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EURUSD: what’s next and why do CPI numbers matter

EURUSD has been moving sideways for the past 3 weeks, not really knowing where to go. The short-term direction is likely to be revealed this week, as Europe (Germany and Italy) and US are unveiling their Consumer Price Index (CPI) monthly and yearly readings tomorrow, and France and Spain doing the same on this coming Fri. The CPI remains the core measure of inflation, and so, depending on whether actuals come above or below expectations and, most importantly above or below last month’s numbers, they are likely to set the tone for the next round of interest rate decisions for both EUR and USD in the next ECB’s monetary policy meeting on the 8th of Sep 2022 (for EUR) and next Fed’s monetary policy meeting on the 21st of Sep 2022 (for USD), respectively. 

Lower than expected July YoY CPI reading and lower than last months (June) YoY CPI reading: in Germany – 7.5% expected in July and 7.6% actual in June; in France – 6.1% actual in June (no expected number reported in July) is bullish (good) for the EUR. Conversely, lower than expected in July – 8.7% – and lower than June’s – 9.1% – YoY CPI reading is bullish (good) for the USD. 

*The opinion expressed in this article does not constitute a trading advice and is of the author alone.

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ECB raises key interest rate for the first time in 11 years: what’s next for EUR vs the USD

European Central Bank (ECB) raised its key interest rate by 0.5% (from -0.5% to 0.00%) – a first rate hike in 11 years. This expectedly, as we published before, pushed the EUR up against the dollar.

The question is what happens next?

Well, key euro interest rate of 0.00%, despite the 0.5% rate hike today, is still very low if we compare it with dollar’s key interest rate (called federal funds rate) of 1.75%. A reminder that Federal Reserve(Fed) raised the dollar key interest rate by 0.75% in their last meeting on the 14-15 th of June from 1% to the current 1.75%.

Why is this important? The key interest rate essentially determines the risk-free return of holding your cash in respective currency in the bank account. So very roughly speaking, if you were to deposit euros into a savings account, your annual payout on those savings would be close to 0.

Whereas, if you were to do that with US dollars, your annual payout would be in the ballpark of 1.75% on the dollars you deposited. This creates greater demand among investors to hold dollars, so investors buy more dollars, sell other currencies, including the euro, which in turn strengthens the dollar and weakens the euro.

So what’s going to happen to EUR against the USD in the short term? The next Fed’s meeting is on the 26-27 of July, where they are expected to further raise the dollar key interest rate by 0.5-0.75%, which would increase the overall rate to 2.25-2.5%. What’s the likely response going to be? Selling of more euros and buying more dollars. These parallel rate hikes by different central banks are often called interest rates wars, as banks try to shore up their currencies to attract capital. So in the short term, we expected a stronger dollar and weaker euro.

The currency value is of course not only affected by interest rates. There are other factors, such as overall currency supply in circulation, but interest rates have a significant impact on the currency value, so until the euro catches up it’s hard to see the path forward for a strong euro.

*The opinion expressed in this article does not constitute a trading advice and is of the author alone.

*Capital at risk

EURUSD jumped back above $1.02 on ECB interest rate hike speculations. The analysts predict an interest rate hike by the ECB of between 0.25% and 0.5% at tomorrow bank’s meeting. The pair reversed after slipping below parity last week and is currently trading at 1.023.

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What is happening with Natural Gas (Natgas)

Despite the bearish macro environment (especially currently seen across global stocks), the natural gas market remains bullish and very much in the uptrend.
The main reason for it is years of underinvestment in supply and production (exacerbated during Covid times), together with minor (on macro scale) factors – sustained high inflation, global supply and demand issues due to war in the Ukraine… Read more

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