FX News And Analysis

A slew of dismal data led to a fall in the greenback on Thursday. The Philadelphia Fed Index of dropped below the zero-line distinguishing contraction from expansion as the Leading Index also posted a negative 0.1% reading when expectations had been of a 0.1% rise. The Leading Index predicts economic growth over the next three to six months and the fall weighed the dollar after increasing the possibility of a more accommodative monetary-policy stance by the Federal Reserve. The Fed Phili Index fell to 5.8 from 8.5 in the previous month on reduced demand from China and Europe. Jobless Claims figures showed the number of people claiming unemployment insurance rose, with Continuing Claims marking an 18k rise while a fall of 22k had been expected. Initial Claims remaining at 370k when a fall to 360k had been forecast. The figures weighed on the dollar and offset gains from an increase in safety demand as a result of continued EU crisis fears, which continue to be a major factor in the dollar's outlook.

EUR
The euro traded lower on Thursday after rumours spread that Moody's was preparing to downgrade Spanish banks. Continued fears Greece might renege on its debts and exit the euro also weighed. A Spanish debt auction in the morning did little to lift sentiment although it was not viewed as a catastrophe. 2.49bn euros worth of 3- and 4-year notes were sold, which fell slightly below the 2.5bn target yet was near enough and, according to analysts, better-than-expected. Yields soared, however, with the 4-year rising to 4.876% versus 4.037% previous and the 3-year note to 4.375% vs 2.890% at a similar auction in April. The marked increase in the 3-year, which is almost neck-and-neck with the 4, is characteristic of a flattening yield curve. This can be a sign of change to a recessionary inverted yield curve environment and is potentially bearish. Overall, it was a volatile day with the spectre of more bad news still present along with the possibility of further declines.

GBP
Sterling accelerated its decline on Thursday. The previous day's Bank of England Inflation report opened a Pandora's Box of disappointments, which significantly altered the outlook for the U.K economy. The possibility of more BOE asset purchases had been steadily receding as interest rates remained above the BOE's 2.0% target, however the report's forecast of lower inflation through 2014 -- coupled with slow growth -- resurrected the possibility. Chancellor George Osborne added to speculation after he voiced support for more easing -- if required, to offset any fall in growth as a result of a government austerity cuts, which may have added fuel to today's sell-off. Some analysts noted a hole in official commentary -- both BOE and government -- where a strategy for growth should have been stated. Less doveish commentary for BOE's Fisher only temporarily slowed declines. Earlier pretensions of Sterling being the new 'yen' dissolved due to over-exposure to European woes. 1.55 beckons and then, perhaps, longer-term, range-bound between 1.50 and 1.60.

JPY
The yen rose on Thursday after growth data exceeded expectations and poor figures from the U.S. weakened the dollar. The release of 1st quarter GDP boosted the yen after it showed annualized growth of 4.1% when a 3.5% rise had been expected and 0.1% noted in the previous period. Quarter-on-quarter, the rise was 1.0% compared to median estimates of 0.9%. Analysts cautioned reading too much into the data as an estimated 40% was attributed to re-building work from the damage caused by the earthquake. In addition, car sales increased directly as a result of a temporary government scheme to subsidize purchases of fuel-efficient cars. Risk appetite continued to be a dominant theme and the yen was helped by continuing pessimism about the future of the Euro-Zone periphery. With little chance of a speedy resolution, the possibility remains for more gain from safe-haven flows and, therefore, a stronger yen short-term.