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European Session – Pound holds above $1.34 as Johnson quits Tory race but euro comes under pressure

The euro and the pound fluctuated against the dollar in European trading on Thursday, though they remained within their recent trading range. End-of-quarter positioning by traders contributed to the volatility.

The pound had a weak start to the day, dropping to a low of 1.3362 dollars towards the end of Asian trading, but recovered to 1.3495 dollars by mid-European session. Improving risk sentiment helped sterling but a surprise announcement from former London Mayor Boris Johnson that he will not run for the Tory leadership contest also boosted the British currency. Up until now, Boris Johnson had been the favourite to replace David Cameron as prime minister. His decision not to stand was taken as a positive sign by investors that the Conservative party may be able to unite post-Brexit vote after what has been described as a divisive referendum campaign.

There was little reaction to the third estimate of UK GDP for the first quarter. British growth was confirmed at 0.4% quarter-on-quarter as expected. However, the current account deficit was larger than expected in the first quarter and this may prove a source of vulnerability for sterling in a post-Brexit era.

The euro followed a similar pattern to the pound against the dollar but fell sharply after the US weekly jobless claims came out, which suggested that the US labor market remains reasonably strong. The single currency slipped to a low of 1.1076 dollars after the US jobs data, having risen as high as 1.1154 dollars after better-than-expected flash inflation data for the Eurozone.

Inflation in the euro area turned positive in June for the first time since January as energy prices fell by less than in recent months. Annual CPI across the Eurozone rose from -0.1% in May to 0.1% in June according to the flash estimate, beating forecasts of 0%. Core inflation was unchanged at 0.8%.

Both the euro and the pound came under renewed pressure though by late European session. The euro was trading close to the 1.11 handle, while sterling was fighting to hold onto the 1.34 level.

The dollar was steady against the yen for most of the day and managed to rebound from its low of 102.44 to 102.86 yen in late European trading. US Jobless claims for the week ending June 25 rose by 10K to 268k. The figure was slightly above estimates of 267k but points to stable and low levels of layoffs in the US economy as anything below 300k is associated with a strong labor market.

In other data for the US, the Chicago PMI of business activity in the Chicago region rose to 56.8 in June from 49.3 in May. Estimates were for a reading of 50.7.

The Canadian dollar came under pressure on Thursday as crude oil prices fell back by around 2%. US light crude dropped to $48.70 a barrel as an improving outlook for supply weighed on prices. The greenback rose to around 1.2995 versus the Canadian dollar with better-than-expected Canadian GDP data unable to halt the loonie’s slide.

Canada’s GDP rose by 0.1% month-on-month in April, in line with estimates, but was up 1.5% on an annual basis, above forecasts of 1.4%.

All eyes will now turn to the Bank of England Governor, Mark Carney, who is due to make a live broadcast at 18:00 GMT. Carney is expected to reassure investors that the Bank is ready to support the market if needed.

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