EUR/JPY extends gains on Ukraine peace hopes, nears YTD highs at 186.88
EUR/JPY accelerated its recovery, reaching 186.50, with YTD highs, at 186.88 on sight.Rumours of a peace deal in Ukraine have sent the Euro higher across the board on Friday.Higher inflation in the Euro Area and Japan raises concerns about the economic consequences of Iran's war.The Euro (EUR) appreciates against its main peers on Friday, boosted by news reporting that Russia and Ukraine might be close to a peace deal. The EUR/JPY has extended its rally from mid-March lows at 182.00 to 186.50 so far, bringing the year-to-date high at 186.88 into focus.
The Euro has been boosted by a Bloomberg report citing comments from a top aide to Ukrainian President Volodymyr Zelenskyy, who suggested that Kyiv might be close to reaching a peace agreement with Russia.
Beyond that, Moscow has declared a 32-hour ceasefire for Orthodox easter, and a top Kremlin official affirmed that there can be peace today if Zelenskyy makes the decision, although he added that Russia wants peace, rather than a ceasefire.
The Euro tread water before that, as market concerns about the fragility of the peace agreement in Iran had kept risk appetite subdued. In the economic calendar, German Consumer Prices Index data for March, released earlier on Friday, confirmed higher inflationary pressures stemming from Iran's war and added pressure on the European Central Bank (ECB) to hike interest rates soon.
On Thursday, the Japanese Producer Prices Index (PPI) revealed a 2.6% year-on-year increase in March, up from the 2.0% reading seen in February, while the monthly PPI jumped to 0.8% from 0.1% in the previous month. These numbers confirm the inflationary impact of the Middle East war and put pressure on the Bank of Japan to hike interest rates in the coming months.
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%.
What is the Consumer Price Index (CPI)?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.
What is the impact of inflation on foreign exchange?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.
How does inflation influence the price of Gold?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.