The EUR/USD rate remains stable on Tuesday as investors react to conflicting news reports regarding US-Iran negotiations. At the time of writing, the pair is trading around 1.1639, after reaching an intraday high near 1.1655.
Iran’s semi-official Fars news agency, citing an informed source, reported that message exchanges between Iran and the United States have been suspended for at least several days over the proposed memorandum of understanding (MoU).
The report contrasts with comments from US President Donald Trump, who said on Monday that negotiations with Iran were proceeding “at a fast pace.” Trump also told ABC News that he expects Washington and Tehran to reach an agreement within the next week to extend a ceasefire and reopen the Strait of Hormuz.
Meanwhile, US Secretary of State Marco Rubio said an agreement with Iran “could happen today, tomorrow or next week.” Rubio also said the first condition for negotiations is for Iran to reopen the Strait of Hormuz, with Tehran also agreeing to get rid of its highly enriched uranium.
The US dollar (USD) remains supported as major sticking points in the negotiations remain unresolved, reducing hopes for a near-term agreement.
The US Dollar Index (DXY), which tracks the value of the dollar against a basket of six major currencies, is consolidating petite losses above the 99.00 level.
The euro (EUR) also finds support in preliminary inflation data in the euro zone. The Harmonized Index of Consumer Prices (HICP) rose by 3.2% y/y in May from 3% in April, in line with forecasts. The core HICP rate accelerated to 2.5% from 2.2%.
The latest inflation data has increased the likelihood of an interest rate enhance at the European Central Bank’s (ECB) upcoming monetary policy meeting later this month. ECB policymaker Olli Rehn said on Tuesday that the ECB is preparing an “insurance hike” in June.
Meanwhile, the number of JOLTS job offers in the US increased to 7.618 million in April from 6.887 million in March, exceeding market expectations of 6.88 million. Investors are now paying attention to the ADP employment change, due on Wednesday, and the non-farm payrolls (NFP) report on Friday.
Lingering inflation risks from oil have strengthened expectations that the Federal Reserve (Fed) can keep interest rates unchanged this year. Upcoming data from the US labor market may play a key role in shaping these expectations.
Frequently asked questions about inflation
Inflation measures the enhance in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (m/m) and annual (y/y) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on, and it is the level aimed at by central banks, which are required 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 (m/m) and year-on-year (y/y) basis. Core CPI is the figure that central banks target because it does not include variable spending on food and fuel. When core CPI rises above 2%, it typically 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 situation occurs when inflation falls.
While it may seem counterintuitive, high inflation in a country causes the value of its currency to enhance, and vice versa for lower inflation. This is because the central bank usually raises interest rates to combat higher inflation, which attracts more capital inflows from around the world from investors looking for a lucrative place to put their money.
Historically, gold was the asset that investors turned to during times of high inflation because it held its value, and while investors will often continue to buy gold for its secure haven property in times of extreme market turmoil, in most cases this is not the case. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are bad for gold because they enhance the opportunity cost of holding gold compared to interest-bearing assets or putting your money in a deposit account. On the other hand, lower inflation is usually good for gold because it lowers interest rates, making the brilliant metal a more viable investment alternative.
