Forex Market: EUR/USD edges slightly lower despite upbeat euro zone data, ahead of ECB meeting

The euro edged slightly lower against the US dollar, despite euro area services activity accelerated at a faster-than-expected-pace in February, amid speculation ECBs officials may have to ease monetary policy at their meeting tomorrow, in order to counter weak price pressure.

Having reached a session high at 1.3745 at 09:00 GMT, the pair erased daily gains to trade at 1.3729 at 12:42 GMT, losing 0.1 % for the day. Support was likely to be received at February 28th low, 1.3694, while resistance was to be encountered at March 4th high, 1.3782.

The euro was supported after the market research group, Markit Economics reported that services activity in the euro zone expanded at a faster-than-expected pace, reaching a 32-month high of 52.6 in February, exceeding preliminary estimates of 51.7. Analysts had expected the PMI to remain unchanged at 51.7. The improvement in the 18-nation common currency services index was led by Germany. The gauge in the largest euro zone economy, rose to 55.9 in February, the strongest level in 32 months, from 53.1 a month ago. Analysts had predicted a smaller increase to 55.4.

Also fanning positive sentiment, Italian services swung from contraction to expansion, rising at the fastest pace in almost three years, with the corresponding PMI coming in at 52.9 in February up from 49.4 a month ago and exceeding analysts projections of a smaller increase to 49.8. Values above the key level of 50.0 are indicative of expansion in activity.

A separate report revealed that exports in the euro area rose 1.2% , helping preliminary GDP rise 0.3% in the fourth quarter, in line with analysts expectations and matching earlier estimates made on February 14.

However, the 18-nation common currency remained under pressure as some investors deemed the ECB should take more decisive steps at its meeting tomorrow and should ease monetary policy, in order to counter weak price pressure.

“Europe needs some kind of stimulus, and we can’t rule out the possibility that the ECB will cut rates this week,” said Masato Yanagiya, the head of foreign exchange and money trading in New York at Sumitomo Mitsui Banking Corp., cited by Bloomberg. “Good U.S. data would give a boost to the dollar to a certain degree.”

Eurostat reported last week that the cost of living in the euro area grew at an annualized rate of 0.8% in February, the same as in the previous month and exceeding analysts’ projections for a 0.7% increase. The data was preliminary and the final figures for February are scheduled to be released on March 17th.

At the same time, core consumer prices, which exclude volatile items such as food, energy, tobacco and alcohol increased at an annualized rate of 1% in February, exceeding experts’ forecasts for a 0.8% advance and up from January’s 0.8% increase.

However, annual inflation remained less than half the ECB target of 2%, which the central bank uses to define price stability. The inflation rate registered a fifth straight reading under 1%, which was referred by ECB President Mario Draghi as a danger zone. ECB officials forecast in December 2013 that inflation will average 1.1% in 2014.

Mario Draghi refrained from taking action to counter low inflation at ECB latest policy meeting in February, but reiterated last week that central bank’s officials are “alert” to risks from low inflation and they are “willing and are ready to act”, if risks of deflation strengthen. His comments came after the ECB left its benchmark interest rate at a record-low 0.25% in February.

According to a Bloomberg News Survey, 25% of the respondents forecast the ECB to cut its main interest from the current record-low 0.25%.

Meanwhile, demand for safe haven assets faded, after Russian President Vladimir Putin said he saw no immediate need to invade Ukraine. These comments indicated that the Ukraine crisis will not immediately escalate. Vladimir Putin said that troops, stationed on the Crimean peninsula, have only been securing their bases. On the other hand, gunmen who have taken control over crucial infrastructure and surrounded military installations were acting independently, according to Russia’s President.

Companies operating in the US private sector probably added 158 000 new jobs in February, according to the median estimate of experts, after a month ago employers added 175 000 workers to payrolls. The official figures by the Automatic Data Processing Inc. (ADP) are scheduled to be released at 13:15 GMT today.

In addition, activity in the US sector of services probably slowed down in February, with the corresponding non-manufacturing index reaching a reading of 53.5, down from 54.0 registered in January. The Institute for Supply Management (ISM) is expected to release the official numbers at 15:00 GMT today. Higher than expected readings will certainly provide support to greenback’s demand.

The ISM reported on Monday that manufacturing activity in the United States expanded at a faster than projected pace in February, which eased concerns that economy may remain vulnerable. The corresponding PMI advanced to a reading of 53.2 last month from 51.3 in January, while analysts had expected that the index will climb less, to 52.0 in February. Values above the key level of 50.0 are indicative of expansion in activity.

Elsewhere, GBP/USD touched a session high at 1.6694 at 09:09 GMT, after which the pair trimmed daily gains to trade little changed at 1.6672 at 10:28 GMT, adding 0.04% for the day. Support was likely to be received at March 4th low, 1.6641, while resistance was to be met at March 4th high, 1.6717.