Trading conditions were inevitably tentative on Friday due to wariness over month-end position adjustment and the main feature was a recovery in the dollar from early lows.
The Euro-zone data releases did not have a major market impact, but did illustrate underlying vulnerability. As far as the region as a whole is concerned, unemployment increased again to a record 12.2% in April from 12.1% previous, another record high since the Euro’s inception. Monthly declines were also reported in French consumer spending and German retail sales.
Most attention focussed on a bleak set of Italian unemployment data with the headline rise rising to a 36-year high of 12.2% while youth unemployment was reported at over 40%. There were further concerns over the potential impact on social tensions and pressure for a more aggressive ECB policy continued to increase.
Bank of Italy Governor and ECB member Visco stated that the ECB stood ready to intervene again as new information came available. He also commented that the bank would consider all possible measures for maintaining credit conditions. The dovish tone fuelled speculation that the ECB would consider a further cut in rates at June’s policy meeting and could look seriously at imposing a negative deposit rate in an attempt to boost lending. The comments pushed EUR/USD back below 1.30 and it was unable to regain any momentum over the remainder of the day.
The initial flurry of US data failed to have a significant impact with a slightly weaker than expected reading on consumer spending. Subsequently, there was an important impact from the Chicago PMI index. A sub-50 reading for the data last month for the first time since 2009 undermined confidence in the economy and inevitably increased attention on this month’s release. In the event, there was a sharp improvement to 58.7 for the May which improved sentiment. There was a renewed increase in US bond yields which also boosted US sentiment as EUR/USD dipped towards 1.2950.
High volatility was again a notable feature in USD/JPY during the day. A sharp sell-off in Nikkei futures pushed the pair to lows below 100.30 ahead of the US open, within striking distance of substantial stop-loss orders placed below 100. The strong US data triggered a rapid reversal as yield rose and the dollar moved back to the 101 area.
Commodity currencies initially traded with a soft tone as AUD/USD again tested support levels below 0.9580 while the Canadian dollar also weakened sharply from highs near 1.03. Rumours of a weak Chinese PMI release over the weekend unsettled both currencies, although the US Chicago release did provide some significant relief.