Despite the European Central Bank?s reluctance to acknowledge the impact that a 1.43 Euro has on economy, the damage can already be seen.
Earlier this week we had softer inflation and weaker confidence reports. Today German retail sales dropped 1.4 percent despite the fact that unemployment hit a 14 year low. Unsurprisingly, confidence in the region as a whole also deteriorated. The EU?s Junker has already said that the strong Euro is starting to be a great concern for the group. It seems to be only a matter of time before ECB President Trichet makes a similar comment. Why has the ECB been so stubborn? Today?s 2.1 percent flash estimate of consumer prices is a good reason. This is the first time in over a year that inflation has rose above their 2 percent target. Even though the rising Euro is suppose to reduce inflationary pressures, the even stronger rise in commodity prices is offsetting that impact. The ECB has a monetary policy meeting next week. Interest rates are not expected to be changed, but as usual keep an eye on the comments that ECB President Trichet makes at the accompanying press conference. He is definitely not expected to bring back the words strong vigilance, but at the same time, he may not be able avoid making cautionary or dovish comments particularly since many banks have been borrowing at the ECB?s penalty rate indicating that the credit markets have far from stabilized.
Written by Kathy Lien, Chief Currency Strategist of DailyFX.com