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- EUR/GBP loses momentum below 0.8400 as traders trim BoE rate cut bets after UK CPI data
EUR/GBP loses momentum below 0.8400 as traders trim BoE rate cut bets after UK CPI data
- EUR/GBP loses ground around 0.8390 in Wednesday’s European session, down 0.13% on the day.
- Traders trim the BoE rate cut bets for August after the UK CPI inflation data.
- The Eurozone HICP inflation data is due later on Thursday, which is expected to show an increase of 0.2% MoM in June.
The EUR/GBP cross trades on a weaker note near 0.8390 during the early European session on Thursday. The Pound Sterling (GBP) attracts some buyers after the UK Consumer Price Index (CPI) for June. Traders will shift their attention to the Eurozone Harmonized Index of Consumer Prices (HICP) inflation data, which is due later in the day.
Data released from the Office for National Statistics (ONS) on Wednesday showed that UK CPI increased 2.0% YoY in June, compared to the previous reading of 2.0%. The market consensus was for 2.0% growth. Meanwhile, the Core CPI, excluding volatile food and energy items) rose 3.5% YoY in June, at the same pace as in May while beating the market estimation. On a monthly basis, the UK CPI increased by 0.1% MoM in June, compared to a 0.3% rise in May and the expected 0.1%.
This CPI inflation report indicated that inflation in the United Kingdom might be stickier, triggering traders to lower their bets on BoE rate cuts for August. This, in turn, lifts the Cable and creates a headwind for EUR/GBP. The financial markets are pricing in nearly 35% odds for a move in August, down from 49% before the inflation data. Also, market players are still seeing 48 basis points (bps) of rate cuts by year-end, down from 50 bps earlier.
On the Euro front, the Eurozone HICP is expected to show an increase of 0.2% MoM in June, while the annual figure is estimated to rise 2.5%. Finally, Eurozone core HICP inflation is projected to remain steady at 2.9%. The hotter-than-expected inflation report in the Eurozone might underpin the EUR and cap the downside for the cross.
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.
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