Euro, British Pound Lag as Euro-zone, UK Data Highlight Lingering Recession

• US Dollar, Japanese Yen Mixed on Low-Volume Trading
• Swiss Franc Remains Range-Bound vs. Euro as Swiss CPI Signals Deflation
• Australian Dollar, Canadian Dollar Retrace Some of Thursday’s Losses - Commodity Dollars Face High Event Risk Next Week

Euro, British Pound Lag as Euro-zone, UK Data Highlight Lingering Recession
The euro and British pound were some of the weakest currencies on Friday as economic data added to evidence that the recessions plaguing the Euro-zone and UK have yet to truly let up. In the Euro-zone, the final readings of services PMI and composite PMI were revised very slightly and both remained below 50 for the thirteenth straight month, indicating that business activity is still contracting. Likewise, retail sales for the month of May fell more than expected at a rate of -0.4 percent, which pushed the annual rate of growth down to -3.3 percent from -2.1 percent. The data comes on the tails of Thursday’s European Central Bank meeting, in which they left rates unchanged at 1.00 percent but left the door open to reductions later on.

In the UK, services PMI slipped to 51.6 in June from 51.7, signaling a further expansion in business activity, though at a slightly slower pace. On the other hand, the Bank of England reported that housing equity withdrawals fell for the fourth straight quarter during Q1 by a record 8.1 billion pounds. This means that on net, individuals in the UK paid down their mortgage debt, which is very good from a personal finance perspective. Nevertheless, borrowing against home equity used to be a classic way to facilitate spending, and with the mindset of endless economic growth, rising wages, and free credit long-gone, the news highlights the prospects for growth to remain very weak for years as consumption wanes.

Looking ahead to next Thursday, the Bank of England is expected to leave rates unchanged for the fourth straight month at an all-time low of 0.50 percent. The central bank’s last policy statement essentially signaled a neutral stance, as no expansions to their quantitative easing (QE) program have been revealed. That said, the final reading of Q1 GDP for the UK was unexpectedly revised down to an annual rate of -4.9 percent, the lowest since recordkeeping began in 1956, from -4.1 percent. This leaves GDP at the bottom of the BOE’s previous range of forecasts, and may push them to consider increasing the scope of their QE program, and signs that this is occurring within the BOE’s policy statement on Thursday could weigh heavily on the British pound.

Related Article: British Pound, Australian Dollar to See Rate Decisions Next Week

US Dollar, Japanese Yen Mixed on Low-Volume Trading
Neither the US dollar nor the Japanese yen saw any clear directional price action as trading volumes were low due to US market closures in observance of the Independence Day holiday. However, the US dollar did manage to hold onto its gains against the euro and British pound a day after the disappointing US non-farm payrolls report triggered broad risk aversion throughout the financial markets.

Looking ahead to Monday, data may show that conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - improved somewhat in June as the Institute for Supply Management index is estimated to rise to 46.0 from 44.0. However, consumer confidence has shown emerging pessimism, primarily on the economic outlook, as the Conference Board’s measure surprisingly fell to 49.3 in June from 54.8. Since risk trends have proven to be the greater driver of price action in the forex markets, a weaker than expected result could trigger flight-to-quality and thus, gains for the US dollar.

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