Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“(Lower Eonia rates) naturally reduces the potential to get anything (easing steps) from the ECB next month”

- Simon Smith, chief economist at FXPro

A couple of weeks earlier we wrote the ECB will have to act soon amid falling central bank’s excess liquidity that pushed the Euribor rate to the highest since August 2012. That time the ECB’s excess liquidity stood at 131.2 billion euros– the lowest level since December 2011.

This week, however, European policymakers managed to lend enough cash for region’s banks to keep overnight money market rates subdued this week as well as quell speculations of another rate cut. Investors focused on the ECB’s cash injections this year, as some small take-ups boosted the overnight rate above the ECB’s key refinancing rate of 0.25%. Investors interpreted these spikes as a potential warning of more stimulus from Mario Draghi and his team.

The ECB failed for the second time this year to drain the financial market of 177.5 billion euros in government securities, it still holds under its previous bond-buying programme. This week, on Tuesday, the central bank drained 151.1 billion euros from the market, with still some 26.3 billion missing the target. Together with taking 115.6 billion euros from the unlimited one-week loans, the ECB is not likely to have enough liquidity to keep rates steady around 0.19% in the coming week.

USD

"As we transition from Bernanke to Yellen, she’s in a pretty good place in terms of holding together the center of the committee. It should be relatively easy to hold together a pretty wide consensus."

- Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ

As it was widely expected the Federal Open Market Committee decided to cut the size of its monthly asset-purchases to $65 billion and left the forward guidance unchanged. The Fed will be now purchasing a total $30 billion in mortgage backed securities and $35 billion in government bonds in order to keep interest rates low and stimulate growth of the world’s largest economy. Additionally, the overnight interest rate was also on hold– at 0%, the level that has been kept unchanged December 2008. The Fed’s current balance sheet has already reached $4 trillion, the figure that raises concerns about causing an asset price bubble, and the latest announcement bolsters the case it will be only rising as policymakers are still adding accommodation intended to support growth, only at a slower pace. The FOMC cited improved economic conditions and stronger labour market, while also noted the latest data were mixed. For the first time since 2011, the decision was backed by all FOMC members and they also pointed out next month the pace of purchases will be reduced as well.

Even though a move was expected by a vast majority of analysts, stocks plunged after the announcement. EUR/USD, however, remained almost unchanged. On a hourly chart the pair moved between the lines of a triangle pattern, and despite a sharp drop to 1.36, the pair was still trading in pattern’s boundaries.

GBP

“The housing market is continuing to gather momentum on the back of further solid gains in employment, record low mortgage rates and rising confidence”

- Robert Gardner, Nationwide's Chief Economist

Britain’s housing market can become a serious headache for the government this year, as even despite recent pledges to address constantly rising property prices, values soared again in January, fuelled by the return of first-time buyers. According to the U.K. largest building society, Nationwide, prices advanced 0.7% this month on a monthly and 8.8% on a yearly basis. Despite a slight slowdown from a month earlier, annual growth picked up 0.4%. Still, the values remain almost 4% below their pre-crisis peak. January’s reading marks a 13th straight monthly rise and put the three-month rate of inflation at 2.9%.

A significant increase in the number of first-time buyers partially reflects stronger performance of the wider economy, especially taking into account the fact 28,000 new jobs were added in the three months to November– the largest gain since records began. At the same time, this week’s GDP report boded well.

While a possible bubble can derail economic growth, Mark Carney explains a rally in house prises as property market was catching up after a slowdown during the financial crisis. Moreover, according to his projections, prices will keep rising robustly until the middle of next year.

CHF

"The SNB has concluded the sustained strong increase in mortgage loans and the prices of Swiss residential properties has caused the imbalances to become even greater in the current low interest-rate environment.”

- The Swiss government

The U.S. Dollar– Swiss Franc cross has been in ascent thus far this week, bouncing back from this month’s low of 0.8901. However, it is too early to speak about a sustainable rally, until the pair breaks 0.9009. As always, the pair is mostly driven by fundamental news form the world’s largest economy rather than the Alpine country. Even though the pair inched lower to 0.897 on the back of stronger-than-expected data from Switzerland, the outlook for the pair is still bullish, keeping in mind the upcoming FOMC meeting.

A monthly report from the UBS bank showed a gauge of consumption trends increased to 1.81 points in December, compared with 1.4 points a month earlier, with the main upside pressure coming from the number of new car registration and stronger demand at retailers. The bank said all of the sub-indicators improved over the corresponding period. What is more important, the measure of business conditions in retail trade rocketed 12 points, hitting the highest level since May 2011.

While consumer and producers prices are still struggling to grow, stronger domestic consumption can boost economic growth. Currently, the government projects a 2.3% for 2014 and a 2.7% growth in 2015. These forecasts and bold statements from Swiss authorities raised speculations the cap on the Swiss Franc will be removed soon.

JPY

"Japan is making steady progress toward beating deflation and reviving the economy due in part to the BOJ's quantitative and qualitative monetary easing,"

- Shinzo Abe, Japan’s Prime Minister

A note of caution for Japanese policymakers came out on Wednesday, as Japanese Prime Minister Shinzo Abe refused to grant the central bank a total independence. Even though, Abe claimed he completely trusts Haruhiko Kuroda and his team and does not exclude such an opportunity in the future. During his speech in parliament Shinzo Abe said he hopes the central bank will steadily proceed with its unprecedented stimulus programme to beat persistent deflation and weak growth in the world’s third largest economy as well as focus on job creation.

The most interesting part for traders was the question about further easing from the BoJ. Shinzo Abe, however, refused providing any bold statements, saying any specific steps should be left to the central bank to decide, citing Kuroda’s remark he will not hesitate to add more stimulus in case the path to meet the 2% inflation target is under threat.

This week’s highlight is Japan’s inflation data scheduled for Thursday. While core inflation is likely to show no change, household spending, unemployment rate and industrial production can push the Yen higher. It is highly probable the central bank will remain in a “wait-and-see” mode until April’s consumption tax hike.