EUR/USD Plunges to One-Month Low as Core Inflation Slows for Second Consecutive Month

In a surprise move, the EUR/USD sold-off sharply on Tuesday, hitting a one-month low of $1.071, or about 1 percent. The sell-off came as a surprise because the Euro tends to perform better against the U.S. Dollar during periods of investor uncertainty when the stock market is trending lower. This typically occurs because the low yields in the Euro Zone have made the Euro a funding currency.

Today’s buying is likely related to the favorable U.S. interest differential which shows the U.S. 2-Year Treasury Notes trading about 1 percent higher than its European counter-part. Technical factors may have also contributed to the weakness since the recent month-long short-covering rally seems to have lost momentum when buyers failed to drive the EUR/USD over $1.1000.

In other news, Spanish Unemployment Change came in at -55.8K, better than the -52.6K estimate. The German Unemployment Change at -14K also bested its -7K estimate.

Euro Zone CPI Flash Estimate was 0.2%, lower than the 0.4% estimate. Core CPI Flash Estimate was 0.9%, below the 1.0% estimate. The data showed that the Euro Zone Core Inflation slowed for the second consecutive month in December. This also helped pressure the EUR/USD because it reinforced the possibility that the European Central Bank will have to add further stimulus to prop up consumer prices and boost growth.

The GBP/USD lost ground on Monday despite a stronger than expected Construction PMI report. The latest figure came in at 57.8, better than the 56.1 estimate. The British Pound has been under pressure lately as investors continue to push forward the timing of the next Bank of England interest rate hike. Additionally, investors are paring positions due to the uncertainty of the referendum later this year that will decide whether the U.K. remains a member of the European Union.

February Comex Gold continued to find support despite the stronger U.S. Dollar. The market was being underpinned by traders selling equities and parking the money into gold as a hedge. Risk aversion is also growing on growth concerns in China and rising tensions in the Middle East. This is helping to increase demand for gold as a safe haven commodity.

The current trading pattern suggests that more weakness in China would be positive for gold prices as well as the lack of inflation risks.

Gold prices could move early Wednesday due to the release of China’s Caixin Services PMI report. Traders are looking for a reading of 52.3, which would be higher than last month’s 51.2 reading.

February Crude Oil prices were under pressure on Tuesday as investors weighed the impact of a weakening Chinese economy on future demand for energy. The stronger U.S. Dollar also impacted prices. Since crude oil is dollar denominated, a rising dollar tends to lower demand from foreigners.

Traders seem to be ignoring the tension in the Middle East between Iran and Saudi Arabia since it doesn’t look like it will directly affect supply.