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EU GDP Slides to Lowest Level in 2 Years as Inflation Rises

The Euro is rising against the dollar and other pairs as the data from the EU point to a stable economy. Earlier today, data from France showed that the consumer prices rose by an annual rate of 2.3% in June. This was higher than the expected 2.2%. In the EU area, the CPI rose by an annualized rate of 2.1% in July while the core CPI data rose by 1.1%, which was higher than the expected 1.0%.

The rise in inflation may be a positive sign for a central bank that is focused on raising interest rates. A high inflation is a classic reason why central banks hike. By hiking, they normalize the interest rates and prevent the economy from being overheated. In the recent ECB meeting, the officials expressed optimism that the rate of inflation was stabilizing at the target. The officials predicted that they would start normalizing after the summer of the following year. This means that the earliest month for the bank to hike will be during the September meeting. A higher than expected inflation will make the case for a rate hike then or even sooner.

Apart from the inflation numbers, the region also released the GDP and employment numbers. In Germany, the unemployment rate remained at 5.2% while the unemployment change of 6K missed the analysts’ forecasts of minus 10K. The total unemployment number in Germany stood at 2.33 million, which was lower than the previously-reported 2.34 million. In the EU area, the unemployment rate remained at 8.3%.

The preliminary GDP numbers for the second quarter were released today too. The numbers disappointed. In the quarter, the EU economy expanded by 0.3%, which was lower than the expected 0.4%. It rose at an annualized rate of 2.1%, which was lower than the expected 2.2%. This was the slowest growth in two years. In the first quarter, the economy expanded by a quarterly rate of 0.4% and an annualized rate of 2.5%. Estimates are that the economy will recover in the third quarter as the EU and the US takes a pause in the escalation of the trade war.

Immediately the data was released, the EUR/USD pair jumped to an intraweek high of 1.1732. The upward trend is still holding as shown below.

Meanwhile, in Turkey, the Turkish Lira weakened against the dollar after the central bank boosted its inflation expectations. The bank expects the inflation rate to rise to 13.4% in 2018. This was higher than the previous target of 8.4%. This means that the central bank will be forced to intervene and hike rates. This is against the expectation of the Turkish president, Recep Erdogan.

This comes at a difficult time for the country. A few days ago, the US threatened to sanction the country as a revenge to the continued jailing of an American pastor. Sanctioning a country whose economic situation is in trouble will lead to more problems for the Turkish economy.

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