Although the Euro remained vulnerable on Thursday, the dollar was unable to take full advantage due to an erosion of yield support.
The latest Japanese GDP data was stronger than expected with an increase of 1.5% for the first quarter compared with an expected 1.0% as consumers front-run the sales-tax increase. The overall impact was limited given expectations of a weaker second quarter and USD/JPY was able to find support at lower levels without being able to hold above 102.
Although the German economy expanded at a stronger than expected 0.8% pace for the second quarter, underlying Euro-zone data was disappointing. The French economy was flat for the quarter while there was a renewed contraction in Italy, the 10th decline in the past 11 quarters. There were also sharp declines for Portugal and the Netherlands which limited Euro-zone GDP growth as a whole to 0.2% compared to an expected 0.4%.
The data reinforced pressure on ECB policymakers with a June rate cut seen as a done deal following the latest data. EUR/USD selling accelerated once there was a break of the 1.3700 area and there was a sharp slide to lows just 1.3650 ahead of the US open.
US growth indicators were mixed with a much stronger than expected New York Empire PMI index and strong tone for the Philly Fed index offset by disappointing industrial data with 0.6% monthly decline. Jobless claims again broke below the 300,000 level which continued to suggest a robust labour market.
Headline US Consumer prices data was in line with expectations at 0.3% while the core reading was slightly higher than expected at 0.2%. A key feature of recent sessions has been the resilience of bond markets to any favourable growth and higher than expected inflation data. This was again a key feature on Thursday with benchmark US 10-year yields dipping to test the key 2.50% level for the first time in over six months and EUR/USD attempted to regain the 1.3700 level.
Yield trends had an important impact on the yen with USD/JPY again put on the defensive. After being unable to hold above the 102 level, USD/JPY dipped to lows below 101.60 with the Euro testing support below 139 as equity markets were subjected to selling pressure.
Sterling was able to regain some ground during the day following Wednesday’s losses with a GBP/USD move back to the 1.68 area. The Swiss franc was a significant early under-performer with some talk of an increase in the Euro minimum level trigger franc selling and USD/CHF peaked near 0.8960 before correcting sharply lower.