Sep 15, 2023

The EURUSD exchange rate continued to fall after the European Central Bank’s surprise rate hike was met by a surprise increase in US inflation.

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EURUSD: Daily Chart

The euro-to-US dollar exchange rate showed signs of strength around the 1.080 level, but has since crumbled back to test the 1.064 level from June. This is a level that the euro bulls will be feeling the pressure at.

Despite some inflationary pressures, analysts had anticipated a pause from the European Central Bank (ECB) due to a recent downgrade of the economy. The central bank cited the recession in Germany, the eurozone’s largest economy, as a factor in the downgrade.

Policymakers made their fourteenth rate hike in fourteen months, averting fears of stagflation and recession. However, the ECB signalled that the most recent hike was likely to be the last.

The Producer Price Index (PPI) in the United States rose higher than expected on the same day. The PPI is a measure of the input prices that businesses pay for goods and services, and its increase suggests that the Federal Reserve may not be finished raising interest rates.

Traders were quick to take advantage of this and pushed the US dollar up sharply, as inflation has been above the Fed’s 2% target for more than a year, and markets are worried about further rate hikes.

The US Producer Price Index (PPI) increased by 0.7% in August, with 80% of the gain attributed to a 2% surge in final demand goods. This was driven by a 20% surge in oil prices, which is expected to continue to push higher in the coming months, as evidenced by the price of oil moving above $90 per barrel on Thursday. This will be a problem for the US economy, as higher energy prices will lead to higher inflation, which will eat into consumers’ purchasing power and slow economic growth.

Nathan Casey at Evelyn Partners in the UK said:

“August’s inflation report in the US saw the headline rate up 0.6%, its highest rate since June 2022. Much of this upward pricing pressure came from energy, with the monthly inflation rate for the sector accelerating to 5.6 percent.”

“A significant driving factor in this was the recent surge in crude oil, which prompted gasoline prices at the pump to rise during August.”

The US stock market staged a rally, but the US dollar also crushed its rival major currencies as traders realised that the data was not helpful to the Federal Reserve’s inflation rate goals.

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