The EUR/USD continues to stick to a narrow trading range with all of the Eurozone's main economic indicators out of the way ahead of Thursday's European Central Bank (ECB) monetary policy meeting.
Focusing on intraday price action, mixed PMI (Purchage Manager Index) data has kept the currency pair in a narrow trading range between 1.35 and 1.3530.
The euro maintained a slightly bullish bias at the start of Wednesday's European trading session with the Spanish and Italian service sector PMIs showing substantial improvements in January. However, the Eurozone's final PMIs were revised lower, including the services and composite indices for January. Nonetheless, Markit's press release maintained an upbeat tone.
"The final reading of the eurozone PMI was down slightly on the earlier flash reading but nevertheless signals a very encouraging start to the year. Companies are reporting the strongest growth of business activity for two-and-a-half years, putting the economy on course to grow by 0.5% in the first quarter if this pace is sustained," said Chris Williamson, Chief Economist at Markit.
"We should expect GDP forecasts for 2014 to start being revised up if the PMI continues to rise, with the consensus of 1.0% growth already looking somewhat conservative."
Eurozone economy buoyed by manufacturing in January
Investors are weighing whether the ECB will feel the need to act on the latest round of data. Before today's PMI release, analysts at Lloyds Bank noted that the ECB may prefer to hold back and wait for more information as recent improvements in the Eurozone PMIs and EONIA look more constrained.
However, traders are not expected to disregard the lower revisions because the ECB would like stronger economic readings to ease concerns of deflation risks and to justify its current stance in monetary policy.
The main disappointment, on the other hand, came from much weaker than expected retail sales data.
Surprise fall in Eurozone retail sales in December
Retail sales fell by -1.0% year-on-year in December although analysts had been looking for a 1.5% increase. Furthermore, the prior month's reading was revised lower to 1.3% from 1.6%.
The poor reading also has negative implications on prices as consumers hold back on spending and encourage businesses to lower prices further, increasing the chances of deflation.
With several banks having already brought forward their expectations for the central bank to act, the debate over policy options is set to continue as deflation risks for the region remain highly evident. The central bank has been reluctant to act on prior occasions, prefering to focus on a medium-term outlook.
For now, the EUR/USD continues to hold the short-term support level at 1.3500 with low volatility expected until Thursday's monetary policy decision, unless there is a big surprise in US data in the afternoon.
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