FX Market Summary 07-25-2013: GDP data disappoints Sterling optimists

Thursday’s Asian session was calmer with markets waiting for further developments surrounding the Chinese economy. The dollar was able to resist further losses without making any significant headway as USD/JPY was blocked below 100.50.

The German IFO index was broadly in line with expectations as it advanced for the third successive month to 106.2 for July from 105.9 previously. Given significant gains for the PMI index released on Wednesday, there was some disappointment that the data was not stronger. The latest Euro-zone monetary data was also weaker than expected with a slowdown in money supply growth and an annual decline in private loans for the thirteenth successive month. In response, the Euro retreated with EUR/USD moving below the 1.32 level.

Confidence surrounding the Spanish economy remained stronger with second-quarter unemployment falling to 26.3% from 27.2%.  Overall, speculation that the ECB would move to change monetary policy next week continued to decline which provided underlying Euro support, despite the fact that IMF did call for further ECB rate cuts to be considered.

Sterling held a firm tone in early Europe on expectations of a robust GDP release. In the event, second-quarter growth of 0.6% from 0.3% previously was in line with consensus expectations. This certainly disappointed more bullish market elements and a ‘buy the rumour sell the fact’ mentality quickly took hold.

There were also expectations that the Bank of England would maintain an aggressive policy of monetary expansion to help sustain stronger growth. Sterling came under significant selling pressure and GBP/USD retreated sharply to lows below 1.5280 before finding some relief. EUR/GBP also rallied to the 0.8630 area.

The headline US durable goods orders data was stronger than expected with a 4.2% gain for June from a revised 3.7% advance previously. As was the case last month, the improvement was driven to a large extent by aircraft orders and core orders were unchanged following a 0.5% gain previously. Elsewhere, initial jobless claims rose slightly to 343,000 from 336,000 previously.

The dollar failed to sustain an initial advance following the US data, but losses were again contained by a rise in US Treasury yields as benchmark 10-year rates moved above Wednesday’s highs to around 2.65%. In this environment, EUR/USD consolidated around 1.3220 as bulls and bears conceded a draw for the day.

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