Major Currency Pairs Analysis: Pound Strengthens Against The Dollar

The euro traded largely flat against the dollar on Wednesday even after data revealed the euro zone economy broke free from its recession in the second quarter. The euro enjoyed some support on data showing that the euro zone economy began expanding anew in the second quarter, breaking free from an 18-month recession. The euro zone's gross domestic product expanded by 0.3% in the second quarter, outpacing market calls for quarter-on-quarter growth of 0.2%. France’s economy grew 0.5%, while Germany’s economy expanded by 0.7%. Meanwhile in the U.S., the Department of Labor reported that the U.S. producer price index came in flat last month, missing expectations for a 0.3% increase after a 0.8% increase in June. The core producer price index eased up 0.1% in July, missing forecasts for a 0.2% increase.
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GBP/USD
The pound traded higher against the dollar on Wednesday after U.S. wholesale pricing data came in short of expectations while a U.K. jobs report met market consensus. The U.K. unemployment rate remained unchanged at 7.8% in June, according to the Office of National Statistics, in line with expectations. The number of individuals claiming unemployment benefits fell by 29,200 in July, better than expectations for a decline of 15,000, which gave the pound support as did the minutes of the Bank of England’s July meeting, which showed that the decision to provide forward guidance on future rate increases was not unanimous. The BoE has established conditions under which forward guidance on rates would not apply. One of these says bank will consider raising rates if medium term inflation expectations rise above 2.5% over 18 to 24 months. Monetary Policy Committee member Martin Weale called for tougher measures to ensure that the pledge to hold rates at record lows did not lead to a pickup in inflation though he did say he accepted the principles of forward guidance. Last week the BoE announced plans to keep interest rates on hold at record lows as long as the U.K. unemployment rate remains above 7%.
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USD/JPY
Japan's core machinery orders fell 2.7% in June from the previous month, government data showed Tuesday, less than expectations for a decline of 7.2%. While a lower corporate tax would benefit already high-flying Japanese equities, the specter of a higher sales tax is what many market participants are focused with debate swirling around whether or not the Japanese economy is strong enough to absorb tax increases of any kind. A higher tax burden could also dash Abe’s hopes of increasing domestic, part of the so-called third pillar of Abenomics, the prime minister’s economic revitalization efforts. Abe has requested his financial ministers further study the impact of a higher sales tax.
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USD/CAD
The U.S. dollar fell to session lows against the Canadian dollar on Wednesday after official data showed that U.S. producer price inflation slowed in July, raising concerns over weakness in the economy. The Department of Labor said producer prices were flat last month, confounding expectations for a 0.3% increase, after rising 0.8% in June. The core producer price index eased up 0.1% in July, missing forecasts for a 0.2% increase. The disappointing data raised fresh doubts over whether the economic recovery is strong enough for the Federal Reserve to begin phasing out its USD85 billion-a-month asset purchase program later this year. Eurostat said the bloc’s economy expanded by 0.3% in the three months to June. Economists had expected quarter-on-quarter growth of 0.2%. It was the fastest quarterly expansion since the first quarter of 2011.
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