Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Inflation is under control and inflation expectations are firmly anchored, both in Germany and the euro area. If anything, risks to the rate are on the downside.”

- Kristian Toedtmann, an economist at Dekabank

German inflation is likely to slow in July for the first time in three months, indicating price gains in Europe’s powerhouse economy remain subdued. Germany’s consumer price index increased 1.8% from the previous year compared to 1.9% in June with prices probably rising 0.1% on month, according to the economists estimations. The Bundesbank expects German inflation will be 1.6% this year and 1.5% in 2015. The central bank cut its 2013 growth forecast for Germany last month from 0.4% predicted in December, referring to worse-than-expected first quarter and saying that Europe’s sovereign debt crisis is still a major threat to the economic recovery. The data will be published throughout today before the Federal Statistics Office reveals nation figures.

Meanwhile, consumer prices in the Euro bloc climbed 1.6% in June from 1.4% a month earlier and 1.2% in April as energy prices rebounded. The ECB revised downward its 2013 inflation forecast for the Eurozone to 1.4% from 1.6%, while kept the 2014 estimate flat at 1.3%.

It is widely expected that the ECB will keep its key interest rate unchanged at a record low of 0.5%, when the officials meet this week. ECB President promised to keep rates exceptionally low for an extended period to help the Eurozone economy revive.

USD

"Mortgage interest rates began to rise in May, taking some of the momentum out of contract activity in June"

- Lawrence Yun, NAR chief economist

Contracts to buy previously owned U.S. homes declined in June, rebounding from a more than six-year high in May and adding to signs that increasing mortgage rates were starting to dampen home sales. The National Association of Realtors said the index for pending sales fell 0.4% to 110.9 in June from a downwardly revised 111.3 a month earlier. The fall, however, was much smaller than the consensus estimate of a 1.7% decline after the May spike to the highest pace since December 2006. Contracts increased in the West, where they reached almost four-year high, but dropped in the Midwest and South, while the index for the Northeast remained flat. Compared to the previous year contracts were up 10.9%, as the housing market recovers from the collapse of a price bubble in 2006.

The housing market has been a bright spot in the economy, providing a buffer from a fiscal austerity. Existing home sales declined in June, while selling prices rose to a five-year high in a sign the housing market was still on track. Additionally, new home sales were up last month. The NAR expected existing-home sales, the biggest component of the U.S. market, to increase more than 8.0% and the average price to jump almost 11% this year. Economists anticipate a gradual improvement in the labour market and an expected economic growth should help push the housing market recovery moving forward, despite higher rates.

GBP

"The rise in net lending to SME's in June fuels hopes that banks are now becoming more prepared to lend to small businesses as the economic environment looks brighter"

- Howard Archer, UK economist at IHS Global Insight

Lending to small and medium sized firms rose at the fastest pace in two years in June, adding to signs that credit conditions are ameliorating for SMEs. The Bank of England said that lending to non-financial SMEs increased by 238 million pounds in June compared with the average monthly decline of 500 million pounds over the past six months. It was also the third monthly gain and the biggest since May 2011, when the records began. Overall lending to non-financial companies shrank by 1.3 billion pounds in June.

Nevertheless, U.K. mortgage approvals fell in June despite the government’s and central bank’s efforts to ease credit conditions, the BoE said on Monday. The number of loans approved for house purchases declined more-than-expected to 57,667 in June from 58,071 a month earlier, against analysts forecasts of a rise to 59,500 in June. The data shows that mutual lenders are no longer able or willing to expand the size of their mortgage books. It is projected that mortgage demand is likely to continue to modestly recover in the coming months in response to the decline in mortgage rates and signs of improvement in the nation’s economy. The government has sought to help home buyers through its Help-to-Buy scheme, which was implemented in April, and the Funding for Lending scheme run jointly with the central bank.

JPY

“A two-step sales tax increase won’t give major damage to growth in Japan’s economy”

- BOJ Governor Haruhiko Kuroda

The Bank of Japan Governor Haruhiko Kuroda showed little concern that the government’s plan to raise the sales tax will derail the nation’s economic recovery as Prime Minister Shinzo Abe weigh whether to proceed with this move. Even with the tax hike, the central bank expects real GDP to rise 1.3% in the fiscal year starting in April. Mr. Kuroda reiterated that the BoJ’s aggressive easing policy launched in April has been right on track, stimulating favourable changes in the economy. Inflationary expectations are increasing owing to bold easing measures, with the nation’s core consumer price index, excluding fresh food, being highly possible to rise 2% year-on-year toward the latter half of the central bank’s projection period through fiscal 2015.

Meanwhile Japanese retailers reported a 0.2% decline month-on-month in June, according to the Ministry of Economy, Trade and Industry on Monday. In contrast, analysts had expected retail sales to increase 0.8% after the 1.5% gain in the previous month. On an annual basis, retail sales rose 1.6%, also against forecasts for a 2.1% advance following the gain of 0.8% a month earlier. Sales from large-scale retailers increased an annual 3.5%, shy of forecasts for a 3.6% jump.

AUD

‘‘It shows how housing activity in general is really quite vulnerable at the moment. We had reason to believe over the last six or nine months there was a bit of recovery underway in building, but these figures would put a question mark over that again”

-Shane Garrett, senior economist for the Housing Industry Association

Approvals for the construction of new houses declined sharply in June, the Australian Bureau of Statistics said Tuesday. Building approvals dropped a seasonally adjusted 6.9% on month compared with analysts’ forecasts of a 2% increase. It is a second monthly decline in a row and on a yearly basis building consents fell 13%. Local councils approved the construction of 12,778 new homes in June after 13,727 approvals in May. The Housing Industry Association has reiterated its call for the central bank to lower the interest rate again by a further 25 basis points in an effort to bolster earlier signs of recovery.

Meanwhile, the Reserve Bank of Australia said the second-quarter inflation data indicates that there is still room for further interest rates cut if the economy requires a boost. The comments follow the release last week of largely benign inflation for Q2 of 2.4%, well inside the RBA’s targeted 2%-3% band. RBA Governor Glenn Stevens also said the drop in the Australian Dollar of more than 10% since April was a normal response to the slowdown in the economy as well as falling export prices, adding that the further depreciation of the nation’s currency will come as no surprise. Earlier this month the central bank kept its benchmark interest rate unchanged at 2.75% for the second straight month after the Aussie slumped.