With hours away from the FED interest rate decision, several unfavorable economic indicators were released in Europe. As such, inflation figures are starting to reflect what seemed inevitable with the higher food and commodity prices. Not only has the CPI in Spain and Italy recently been higher than expected, but the overall annual CPI estimate for the Euro Zone was 2.6% when 2.3% was expected. Furthermore, Euro Zone economic confidence also came in less than expected. Finally, the busy morning includes an unemployment rate that is worse than expected.
Increasing inflation along with a slowing economy is a mix that greatly complicates things for the central banks and their monetary policies. As such, the question at hand when looking at the Eur/Usd for the medium-term might be, "Which of the two economies is in the least worst shape?" and "Which economy will recover first?."
The European economy was starting to prove very resilient and might have been the cause to the recent Euro rally. The important exports were resisting the higher euro, and high energy prices weren't being passed to the consumer just yet. Today's data could start to question all this although we still need more concrete indicators.
The inflation pressures could incite the bank to increase rates but could it really afford to do so and further hamper economic growth with a Euro that is already so high and turbulent money markets?
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