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EMU Inflation Boosts Euro, US GDP Retreats

Posted by Joseph Trevisani on Feb 28, 2014 12:13:00 PM

If there is one statistic that could push the ECB to unorthodox policy measures and the euro lower, it is deflation.  The relief rally in the euro after the release of  euro zone CPI data in the European session is an indication of how seriously traders take the threat.

Estimated annual inflation in the EMU was 0.8% in February as in January and that is just 0.1 percent above the post-recession 0.7 percent low in October and January, according to Eurostat the statistical bureau of the European Commission. Economists in the Bloomberg survey had forecast a return to 0.7 percent.

The estimate for annual core inflation ticked up to 1.0 percent in February just over the 0.8 percent forecast and the January rate.  The December 0.7 percent pace was the lowest in records that go back to 1991.

The euro jumped from 1.3730 to 1.3780 within a minute of the release and to 1.3813 within 30 minutes. Since breaking 1.3800 on that the initial move, the euro has been no lower than 1.3788 and subsequently touched a high of 1.3824.

ECB officials including President Mario Draghi have made many statements over the past months about the danger of deflation. They have proposed various policy solutions including negative interest rates, an end to weekly sovereign debt sterilization and possible bond or securities purchases. With the possible exception of sterilization the choices the choices are opposed by the Bundesbank the German central bank.

Higher inflation has been predicted by the ECB for many months and this increase, however slight, will help allay fears that the weak euro zone economy is teetering on actual deflation.

The revision to U.S. fourth quarter GDP while bigger than forecast was a non-event for the currency markets.

Annualized economic growth dropped to 2.4 percent in the last three months of the year  from the initial estimate of 3.2 percent. Economists had predicted a fall to 2.5 percent.

Economic expansion is likely to remain weak in the first quarter as much of the U.S. was buffeted by severe winter weather. Statistics from the first two months of the year have been mixed but most show a deceleration of economic activity that will now be more worrisome as it began from a much lower level of fourth quarter action.

The 8:30 am release saw a quick pop in the euro to 1.3816 with the view that weak U.S. growth makes the Fed taper policy a bit more problematical.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Alpha Trader,  Bloomberg

ScreenHunter 2150 Feb. 28 13.39

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