CPI sends dollar to 8-month high versus euro

US consumer prices increased by 0.3 per cent in June, according to figures published by the Labor Department today (July 22nd). 

Although this represents something of a slowdown from the consumer price index (CPI) gain of 0.4 per cent in the previous month, it matches the consensus estimate and adds to the mounting speculation that the Federal Reserve will be required to lift interest rates earlier than previously anticipated. 

The core measure, which strips out traditionally volatile categories such as food and fuel costs, ticked 0.1 per cent higher, just below expectations.

Last week, Fed chair Janet Yellen warned the central bank may hike borrowing costs sooner and more sharply than originally imagined if the country's labour market continues to provide evidence of strong growth.

Much of the rise in the CPI for June was attributed to higher gas prices, which were up by 3.3 per cent, following a 0.7 per cent rise in May. Electricity costs increased, but the pace of growth slowed from the previous month's 2.3 per cent result. Food prices recorded their smallest jump since January with a 0.1 per cent gain. 

Following the release of the data, EUR/USD declined by 0.45 per cent to 1.3459 – the dollar's strongest level versus the European shared currency since November 21st 2013.

​E​xpectations the Fed will start to tighten its monetary policy come at a time when the European Central Bank is adopting measures designed to provide further stimulus to the eurozone economy and ward off the threat of deflation.

Last month, president Mario Draghi took the unprecedented step of reducing the bank's deposit rate below zero and introduced an additional scheme to boost lending to small businesses.

Mr Draghi is known to consider the relative strength of the euro to be detrimental to the region's economic progress, but the stimulus measures announced in June had less of an impact on EUR/USD than Ms Yellen's testimony last week or today's data.

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