The euro traded little changed against the US dollar on Wednesday, following a report that showed industrial production in the euro zone unexpectedly fell in January, led by a slump in energy output, underlining the fragile recovery of the 18-nation common currency area from a record-long recession.
EUR/USD hit a session high at 1.3875 at 10:32 GMT, after which the pair trimmed daily gains to trade little changed at 1.3860 by 10:58 GMT. Support was likely to be received at March 11th low, 1.3834, while resistance was to be met at March 11th high, 1.3877.
Eurostat reported today that factory output in the euro area fell 0.2% in January, defying analysts projections of a 0.5% increase. Factory production in December was revised to a 0.4% decline, from a previously reported 0.7% drop. On annualized basis, factory output rose 2.1% in January from a year ago, exceeding analysts estimates of a 1.9% increase and after Decembers reading was upward revised to a 1.2% gain from previously estimated 0.5% advance.
Data from the report revealed that the decline in industrial production was led by a slump in energy production, which fell 2.5% for a second month in January and output of durable consumer goods, which declined 0.6%.
Yesterday, the euro came under selling pressure after ECB Vice President Vitor Constancio was cited by Market News International as saying comments made by ECB President Mario Draghi at last week’s policy meeting “were not taken in completely.” “The forward guidance was made more precise in relation to the existence of this slack. Unfortunately … this was not picked up by the markets,” he added, cited by the same source.
Constancio’s comments come after European Central Bank Governing Council member Christian Noyer said yesterday that strengthening of the 18-nation common currency created downward pressure on euro zone’s economy. Last week, ECB President Mario Draghi also addressed the problem, saying that a stronger euro may affect the central bank’s price-stability objective.
The 18-nation common currency has risen 6.7% in the past 12 months, curbing the price of imported goods, while also challenging the competitiveness of euro zone’s exporters.
On March 6th, the Governing Council of the ECB maintained its benchmark interest rate at a record-low 0.25%. The Council also decided to keep the deposit rate at zero and the marginal lending rate at 0.75%. On the press conference, following ECB’s interest rate decision the central bank President Mario Draghi said that deflation risks in the euro area are easing, boosting euro’s demand.
The ECB predicted that inflation will gradually accelerate. According to central bank’s estimates inflation in the euro area, which was at 0.8% last month, will accelerate to 1.7% in the fourth quarter of 2016. The cost of living will rise 1% this year, while it will accelerate to 1.3% in 2015 and an average 1.5% in 2015.
While the recovery remains fragile, with inflation still less than half the ECB target of 2%, which the central bank uses to define price stability, economic data in the past four weeks seemed encouraging. Gross domestic product in the 18-nation common currency area rose 0.3%, more than analysts had projected, mainly driven by stronger expansions in Germany, France, Netherlands and a return to growth in Italy. In addition, economic sentiment jumped to more than a 2-1/2-year high last month, while services and manufacturing output surged the most since June 2011.
Meanwhile, greenback’s demand continued to be supported after two Fed officials commented on Monday that the hurdle rate to alter the pace of Fed stimulus cuts was too high.
Fed President of Philadelphia Charles Plosser, who is a voting member this year, commented yesterday that the recent batch of strong US economic data wasn’t enough to alter the pace of the central bank asset purchases. His statement was later echoed by Chicago Fed President Charles Evans, who will not vote on policy this year.
“Given the fact that we’ve embarked on measured reductions, it’s important to give some certainty or at least clarity to the markets on what we’re doing,” Plosser said in a Bloomberg interview. “It’s OK to continue at 10 billion. The hurdle rate for change is pretty high in either direction.”
At the same time, Fed officials will try to determine whether the weakness economy has recently demonstrated is due to temporary factors, before their next policy meeting scheduled for March 18-19th.
The central bank announced in December that it will pare monthly bond-buying purchases by $10 billion, after which it decided on another reduction of the same size at the meeting on policy in January, underscoring that labor market indicators, which “were mixed but on balance showed further improvement”, while nation’s economic growth has “picked up in recent quarters.”
Elsewhere, USD/JPY touched a session low at 102.81 at 07:00 GMT, after which the pair consolidated at 102.87, losing 0.14% for the day. Support was likely to be received at March 11th low, 102.79, while resistance was to be met at March 11th high, 103.42.
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