UK pens largest GDP fall on record
The Pound’s impressive run of form against the Dollar ended as it lost ground sharply due to weaker risk appetite and concerns over the economic outlook, especially with EU trade stresses. Arguably there was also some caution ahead of the April GDP data release. Sterling dipped below 1.2650 on the Dollar and the Euro strengthened to test the 1.1111 level. Risk sentiment dominated with falling equity markets pushing the Pound down below 1.2600 on the Dollar, although it did push back to 1.1148 against a weaker Euro.
Boris Johnson and EU Commission President von der Leyen have agreed to a further meeting on June 15th, to intensify trade negotiations. An extension to the transition period is expected to be formally ruled out today and reports emerged that border checks from 2021 would be scaled back.
The ONS reported that UK GDP contracted 20.4% in April, exceeding the forecast of 18.7% with a 10.4% decline in the 3 months to April. Industrial production contracted 20.3% and construction output shrank by 43.6%, but the trade deficit narrowed. The market reaction was muted as Sterling trades below 1.2600 on the Dollar and near 1.1130 on the Euro.
US initial jobless claims declined to 1.54mn in the latest week from a revised 1.90mn the previous week. This was slightly below consensus forecasts and the lowest reading for 12 weeks, although claims remained substantially higher than pre-COVID levels. Continuing claims declined slightly to 20.9mn from 21.3mn, but were above consensus forecasts, maintaining the element of uncertainty over the May employment report.
Producer prices increased 0.4% on the month with the year-on-year decline held at 0.8% while core prices increased 0.3% on the year.
The dollar gained a notable element of defensive support as risk appetite deteriorated and the Euro retreated to below 1.1300 before regaining some ground to trade just above this level in early Europe this morning.
Italian industrial production declined 19.1% for April following a 28.4% reading the previous month and with a shocking 42.5% annual slide from 29.5% previously and slightly worse than consensus forecasts of a 40% decline. The data reinforced concerns over the Italian and wider Euro-zone outlook.
The Euro lost territory ahead of the US open, although overall losses were limited as underlying dollar sentiment also remained negative and after hitting lows around the 1.1325 level, the Euro recovered ground but hit selling interest on approach to 1.1400.
There is an element of caution ahead of today’s Eurogroup meeting later in the day and as of writing, the Euro trades just above the 1.13 mark against its US counterpart.
Data to watch
06:00 – GBP – GDP
06:00 – GBP – Manufacturing Production
14:00 – USD – Prelim UoM Consumer Sentiment