The preliminary inflation data, which was released yesterday in a number of countries in the EU, honestly look alarming. In Italy, everything is not so scary and not so bad, since inflation rose from 1.1% to 1.3%, against the expected growth of 1.5%. Therefore, we can say that inflation is growing much slower than predicted, which means there is no reason to worry. After all, if inflation is growing slowly, then the European Central Bank has no reason to raise the refinancing rate, and the economic recovery is not threatened.
Inflation (Italy):
However, Italy is only the third economy in the euro area, and Germany is the first. In Germany, the situation is somewhat different, as inflation rose from 2.0% to 2.5%, although growth was expected only to 2.3%. Here, we can safely say that European inflation is growing somewhat faster than expected. As already known, a strong rise in inflation threatens sustainable economic growth, which does not exist in Europe yet. The European economy still needs to recover from the effects of the coronavirus, and high inflation certainly complicates this process. The problem is that the European economy is not yet ready to raise interest rates, and central banks can only fight inflation by tightening monetary policy.
Inflation (Germany):
In other words, today's release of preliminary data on inflation in the euro area may present an extremely unpleasant surprise. It is expected that inflation will accelerate from 1.6% to 2.0%, that is, just to the target level set by the ECB. After this, it seems that an increase in the refinancing rate should follow. It is worth noting that the European Central Bank warned everyone at the beginning of this year that this option is quite possible if inflation will grow at a fairly rapid pace. And in general, that's what we're seeing.
Moreover, the latest data on Germany clearly hints that inflation may grow slightly stronger. And for the above-mentioned reasons, such a development will undermine the position of the Euro currency, since the European economy is obviously not yet ready for an increase in interest rates. However, we must also take into account the fact that the euro has the greatest influence on the dollar index. So if it declines against the US dollar, the greenback will strengthen against all currencies of the world. To simply put it, the inflation data in Europe can affect all currencies of the world, which will start with the pound.
Inflation (Europe):
The EUR/USD pair managed to resume the previously set upward cycle in the market after a short stagnation, which ultimately led to the resistance area of 1.2235/1.2245. The current pullback that is taking place is still relevant. To continue the upward cycle, market participants need to keep the quote above the level of 1.2250 in an H4 time frame.
The GBP/USD pair is still moving within the borders of the previously set sideways channel 1.4100/1.4245, where we have a control convergence of the price with its upper limit relative to the recent cycle. Here, two methods are still considered at once: a rebound and a breakdown, but in the case of the second approach, the quote must be kept above the level of 1.4250 for an H4 time frame.
