The European session on Thursday was marked by erratic trading and high volatility even though there were no major economic data releases.
The Nikkei index was again a notable feature with a fresh decline of over 5% on the day, which pushed the dollar to a test of important support in the 100.60 region. EUR/USD was also broadly resilient and made an attempt at pushing through the important 1.3000 technical barrier. The pair briefly moved above this level, but there was a lack of follow-through buying.
There was a wire report suggesting that the Japanese Government Pension Investment Fund (GPIF) was considering allowing a greater allocation of funds into equities following the monetary policy change and gains in Japanese stocks. Although there had already been similar reports, there was a surge in demand for the dollar against the yen with a move to 101.80. As US bond yields also increased, the US currency regained support across all major currencies and the Euro was forced to retreat.
The latest US economic data releases were weaker than expected with the first-quarter GDP estimate revised down slightly to 2.4% from 2.5%. There was also an increase in weekly jobless claims to 354,000 from a revised 344,000 previously. There was a more muted reaction to the pending home sales data, but this was also weaker than expected with an increase of 0.3% compared with an expected 1.3%.
The dollar bullish case has been built on the foundations of stronger US growth and an early move by the Federal Reserve to scale-down the rate of bond purchases in its quantitative easing programme. The US currency, therefore, remains very sensitive to any suggestion that growth is less robust than expected. In this context, there was inevitably a significant market reaction to weaker than expected data. Dollar sensitivity was also increased by heavy speculative positioning in favour of the US currency.
The Euro found support just below 1.2945 and pushed sharply higher again following the US data. The strength of dollar demand in the 1.30 area had already been sapped earlier in the day and this time the Euro was able to break higher. In the process, substantial stop-loss Euro buying was triggered, which pushed EUR/USD to three-week highs above 1.3050.
Sterling was also subjected to high volatility during the trading day, buffeted by wider dollar moves and technical plays. An initial GBP/USD move to the 1.52 resistance area was repelled quickly and the pair fell sharply back towards important support near 1.51. Wider dollar losses then triggered a fresh move to the 1.52 area late in the European session.