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EUR/USD continues slump, as Yellen expects Fed to hike interest rates

ForexMay 22, 2015 06:16PM ET
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The euro against the dollar on Friday for the fifth time in six sessions

Investing.com -- The dollar continued its recent rally against the euro finishing higher against its European counterpart for the first time in five weeks, amid mixed U.S. consumer pricing data and comments from key central bankers on both sides of the Atlantic on the short-term outlook of both economies.

EUR/USD closed the week at 1.1014, after ending Friday's session down 0.0099 or 0.89%. The dollar appreciated significantly against the euro on the week, gaining nearly 3% after the pair opened on Monday at 1.1444. EUR/USD has now fallen in five of the last six sessions.

The pair plunged from a near intra-day high of 1.1175 to a near session-low of 1.1016 within a span of 90 minutes during U.S. morning trading. The first major announcement came around 8:30 EST when the U.S. Bureau of Labor Statistics said its headline Consumer Price Index gained 0.1% in April from the previous month, falling slightly below economists' forecasts. Over the last 12 months, the CPI-U all items index is down by 0.2%.

A reading of the less volatile Core CPI Index, which excludes food and energy prices, was ostensibly less deflationary. The Core CPI rose 0.3% for the month, its highest gain since January, 2013, and 1.8% on a year-over-year basis. The deflationary pressures could be attributed almost entirely to a sharp drop in energy prices. The Federal Reserve would like to see inflation move toward its targeted goal of 2% on an annual basis before it institutes its first interest rate hike in nearly a decade.

Shortly thereafter, European Central Bank president Mario Draghi emphasized the importance of enacting structural reforms with the European economy during a speech in Sintra, Portugal. Draghi indicated that the reforms have the potential to permanently and positively impact the supply-side of the economy.

"They lift the path of potential output, either by raising the inputs to production – the supply and quality of labor and the amount of capital per worker – or by ensuring that those inputs are used more efficiently, i.e. by raising total factor productivity (TFP)," Draghi said. "And second, they make economies more resilient to economic shocks by facilitating price and wage flexibility and the swift reallocation of resources within and across sectors."

Hours later, Federal Reserve chair Janet Yellen said that an interest rate hike will be appropriate at some point in 2015, if there are continual improvements in the U.S. economy. Speaking at a luncheon at the Greater Providence Chamber of Commerce, Yellen indicated that the U.S. economy appears well-positioned for continued growth as transitory factors from a colder than usual winter and a West Coast port labor dispute start to fade.

While the dollar inched up following Yellen's speech, her address had little impact on the EUR/USD pair. Yields on U.S. 10-Year Treasuries rose by roughly two basis points on Friday to end the session at 2.215%. Bond markets typically rally when the CPI moves higher.

EUR/USD continues slump, as Yellen expects Fed to hike interest rates
 

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