EUR/USD trims daily gains on ECB easing speculation

The euro trimmed daily gains against the US dollar on Monday to trade little changed, as annual inflation in the euro zone remained under 1% for a fourth month and after the European Central Bank President Mario Draghi reiterated that the central bank is ready to ease monetary policy as early as next month if risks of deflation strengthen.

EUR/USD touched a session high at 1.3773 at 09:00 GMT, after which the pair erased daily gains to trade little changed at 1.3731 by 12:53 GMT, losing 0.06% for the day. Support was likely to be found at February 21st low, 1.3702, while resistance was to be encountered at February 19th high, 1.3774, also the pairs highest since January 2nd.

Euros demand was pressured after it became clear that consumer prices in the euro area fell in January at the fastest pace since records began in 2001. Eurostat reported today that the harmonized index of consumer prices for the euro zone declined by a record 1.1% in January after a 0.3% advance in the previous month. The annual inflation rate rose 0.8% last month, up from a preliminary estimate of 0.7% and after inflation increased by 0.8% in December. However, annual inflation remains near its weakest level ever and is less than half the ECB target of just below 2%.

The data suggested that consumer demand in the region remains weak and will probably continue to hamper economic development. The significant decline in the monthly consumer price index may prompt ECBs policy makers to take action in order to stimulate the economy in the common-currency bloc as early as next meeting on March 6th.

Data scheduled to be released on February 28th may show that annual consumer prices rose 0.7% this month, signalling a fifth straight reading of inflation under 1%, which was referred by ECB President Mario Draghi as a danger zone.

“We don’t see what is defined to be deflation,” Draghi said yesterday, speaking to reporters after G-20 policy makers met in Sydney, cited by Bloomberg. “We are aware of the risks. The Governing Council is willing and ready to take any action in case these risks were to gain strength.”

For now, interventions are postponed at least March 6th, when the central bank is going to publish its quarterly macro-economic forecasts, which will provide first inflation predictions for 2016. Previous forecasts have revealed that the ECB should take more decisive steps and should further ease its monetary policy.

However, the 18-nation common currency received support earlier in the trading day, after data showed that German business confidence advanced in February to the highest level since July 2011. The Munich-based IFO Institute reported that the index of business climate in the country, based on a survey among 7 000 companies, rose to 111.3 points this month, confounding analysts expectations for a decline to 110.5 from Januarys reading of 110.6 points. The report also revealed that German business was significantly more satisfied with the current state of the economy, reflected in the sub-index, as it jumped to 114.4 in this month from 112.8 points in January. The other sub-index which tracks the expectations about the economy in the coming months decreased slightly to 108.3 points, but exceeded forecasts for a decline to 108.1.

These data points suggested that euro zones largest economy is on track to expand steadily in the first quarter, after scoring only limited growth in 2013.

Meanwhile, in the United States, the number of existing homes sold dropped considerably in January, which implied that housing market was still experiencing the adverse influence of both high mortgage rates and severe weather conditions. According to data by the National Association of Realtor’s (NAR) released on Friday, existing home sales in the country decreased 5.1% in January compared to a month ago to reach the annualized 4.62 million units. The indicator recorded a fifth drop in the past six months, while at the same time home sales reached their lowest level in 18 months.

Experts had anticipated that existing home sales will fall less, to 4.68 million units in January, following 4.87 million homes sold in December. Analysts suggested that the combination of weaker supply and stronger demand in nation’s housing sector led to a jump in home values.

Elsewhere, GBP/USD hit a session high at 1.6679 at 10:00 GMT, after which consolidation followed at 1.6661, adding 0.28% for the day. Support was likely to be received at February 12th low, 1.6426, while resistance was to be met at February 21st high, 1.6725.