The British pound (GBP) was trading lower following today’s heavy decline in UK GDP data, while the euro (EUR) recovered some of its recent losses after German unemployment surprised to the upside.
The GBPUSD pair fell through the 1.5300 support level in morning London dealing after UK GDP figures disappointed the market, indicating that disposable income plunged by the largest margin since 1987 in the first quarter of this year. On a quarter-over-quarter basis, UK GDP printed in line with expectations at 0.3%, but year-over-year, the figure was revised lower from 0.6% to 0.3%.
Overall, the UK data proved to be a negative shock, as real household income fell by -1.7% from the previous three months while business investment declined by -1..9%. The news showed the extent of the hardship faced by UK consumers as the country's economy continues to sputter five years after the financial markets crashed.
Nevertheless, although Q1 data has been clearly disappointing, the most recent economic releases from the UK have shown considerable improvement, suggesting that growth in Q2 will likely be much stronger.
Therefore, the currency markets were torn between trading the disappointing past or the promising future. GBPUSD slid to a low of 1.5265 in the aftermath of the news, but has since stabilized just below the 1.5300 figure ahead of today’s North American session.
Strong German Data Favors Euro
In the Eurozone, the news was considerably better with German unemployment figures showing that jobless claims were pared down another -12K versus market expectations for an increase of 7K. German labor demand remains robust, and that should help drive the region’s largest economy higher in Q2 of this year. The news helped to steady the EURUSD above the 1.3000 mark, but the pair remains in a downtrend with 1.3050 capping any upside action for now.
See related: A EUR/USD Question to Be Answered Thursday
One nagging concern for the euro (EUR) is the uptick in sovereign debt yields. Today's Italian BTP auction of five- and ten-year paper saw steady bid-to-cover ratios, but the yields rose by 30-50 basis points (bps) for the various tranches. While rates remain considerably lower than the spike highs from 2010, the rise in interest costs for the periphery economies is a clear drag on growth and spending, and it could become a real concern for the market if BTP yields rise above the 5% mark.
A USD/JPY Move That’s Possible Today
In North America today, the market will get a glimpse of the weekly jobless claims as well as personal income and spending data. Expectations are for an improvement in both, and if the data proves positive, USDJPY—which traded above the 98.00 figure for most of the overnight session—could mount a challenge of the 98.50 barrier as traders begin to reassert their belief in the US growth story.
By Boris Schlossberg of BK Asset Management