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By HaleStewart January 31, 2014 9:01 am
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Recent EU and US Economic Data Spell Bearish Result for EUR/USD

Above is a chart for the EUR/USD.  For the last half of 2013 the euro rallied as EU news tended to be more bullish relative to US news.  But since that time, we've seen a turn of events towards the US.  First, the last two quarters of US economic growth have been over 3%.  This has allowed the Federal Reserve to begin tapering its asset purchase programs.  Both of these developments have been dollar positive.

But recent inflation news from the EU has been euro bearish.  Today we learned

Euro area annual inflation is expected to be 0.7% in January 2014, down from 0.8% in December 20133, according to a flash estimate4 from Eurostat, the statistical office of the European Union.

This news is part of a clear downward trend in EU inflation:

As the chart above shows, inflation has been dropping for the last two years.  As a result, pressure is growing on the EU to do something to stimulate inflation.

Until the EU begins to get some inflation on the books, the ECB will be under pressure to loosen policy.  This means we have two central banks moving in opposite directions, with the result being a change in the EUR/USD trade.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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