Eurozone flash Harmonized Index of Consumer Prices (HICP) rises at an annualized pace of 2% in December, as expected, slower tahn 2.1% in November. On month, price pressures grew by 0.2% after deflating 0.3% in the previous month.
Market reaction
EUR/USD has attracted bids after the data released and rises to near 1.1690.
(This section was published at 08:40 GMT as a preview of the Eurozone preliminary HICP data for December.)
The Eurozone Prelim HICP Overview
The Eurostat will publish the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for December later on Wednesday at 10:00 GMT.
Eurozone HICP inflation is expected to ease to 2.0% year-over-year (YoY) in December, from 2.1% in November. Meanwhile, the annual core inflation is anticipated to remain consistent at 2.4% in the reported month.
The monthly Eurozone inflation and core inflation were at -0.3% and -0.5%, respectively, in November.
How could the Eurozone Prelim HICP affect EUR/USD?
The EUR/USD pair may gain ground if Eurozone HICP data comes in stronger than expected. The inflation and core inflation are both expected to come above the European Central Bank’s (ECB) target of 2.0% YoY. However, the pair remains subdued following the release of Germany’s Retail Sales, which climbed 1.1% year-over-year (YoY) in November, following an increase of 0.9% in October. Monthly Retail Sales fell 0.6% in November, against a 0.3% decline in October and the market expectations of a 0.2% increase.
The EUR/USD pair also depreciates as the US Dollar (USD) rebounds and continues to gain ground ahead of the upcoming US economic data that could shape expectations for Federal Reserve (Fed) policy. US ADP Employment Change and ISM Services Purchasing Managers’ Index (PMI) data for December will be eyed later in the day.
Technically, the EUR/USD pair extends its losses, trading around 1.1680 at the time of writing. Technical analysis of the daily chart indicates a potential for a bearish bias; the 14-day Relative Strength Index (RSI) at 43.22 confirms waning momentum.
The EUR/USD pair moves below the 50-day Exponential Moving Average (EMA) at 1.1682. A close below the medium-term average would put downward pressure on the pair to test the monthly low of 1.1589, set on December 1. Rebounding above the 50-day EMA would maintain the medium-term price momentum and support the pair to target the nine-day EMA at 1.1720, followed by the three-month high of 1.1808, which was recorded on December 24.
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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