Daily Forex Fundamental Overview

Fundamental Analysis

Last week’s overview, this week’s key events

The first week of the month always represents a great opportunity for traders, who use fundamental analysis to predict possible currencies’ fluctuations. What can be more important than central banks’ meetings? And during this week policymakers in Australia, Britain and Europe will decide whether their economies are strong enough to withstand a rate hike, or, in contrast– additional stimulus will be required. Last week we have observed aggressive sell-offs in the markets; however, the sentiment across Dukascopy traders has changed a lot over the last five trading days. Hence, traders are now less confident EUR/USD will be depreciating steadily, as traders sentiment is only 60% bearish, compared with 75% on January 27. The similar situation can be noticed with the cable and USD/JPY.

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. The move was widely anticipated, hence, market reaction was quite moderate. Moreover, it seems the Fed is unlikely to shake markets this year, as according to analysts’ projections, the U.S. central bank will be trimming their monthly asset-purchases by $10 billion per month until the stimulus is withdrawn completely. The most traded currency pair was highly volatile during the last two weeks, with first soaring above 1.37 on the back of positive manufacturing report from Europe, while last week even weak Q4 growth of the U.S. economy was not able to outweigh disappointing German inflation figures. Moreover, it was not a surprise that markets were practically unchanged following Friday’s EU CPI report. It is important to mention, that traders are expecting the greenback to appreciate soon, as American currency is bought in 58% of the cases across the board.

This week’s highlight will be the EUR/GBP pair. From the perspective of technical analysis, the pair is likely to perform a sharp downside rally, as it is not trading in boundaries of a descending triangle anymore (4H chart). Moreover, on January 21 the pair performed a throwback already, making it even more attractive for short traders. While market sentiment is not clearly marked, vast majority (65%) of pending orders are placed to sell the pair, ready to provide additional support for pair’s downside movement. From the perspective of fundamental analysis, the pair also has a great potential to dip toward a recent low at 0.8169. Data from the U.K. pillars– manufacturing, construction and services sectors can surprise markets to the upside, while on Thursday policymakers can provide some hawkish comments and adjust their forward guidance, even though they are likely to stay pat on the monetary policy. On the other hand the ECB can announce fresh stimulus, taking into account weaker-than-expected inflation data.

EUR

“After the softer inflation data in January, the staff forecast of 1.1 percent on average in 2014 looks too high”

- Mark Wall and Gilles Moec, Deutsche Bank chief economists

The single currency fell to the lowest level since November 22 this weak, following the disappointing inflation report on Friday, amid concerns that constantly weakening inflationary pressure in the 18-nation bloc will prompt European policymakers to ease monetary policy further. Moreover, the Euro is expected to remain under pressure until the ECB’s meeting on Thursday.

The Consumer Price Index rose just 0.7% in January from the same period a year earlier, and decelerating from December's reading of 0.8%. Analysts have expected the CPI to reach 0.9%. The data confirms earlier fears that inflation is indeed far below the official target of 2%. According to the latest projections from the ECB, a measure of inflation is expected to remain around 1.1% during the whole of 2014. Another serious concern is German inflation that also came below the average forecast, supporting the case of weak inflation even in core countries.

While the ECB is unlikely to cut its key refinancing rate this week, it still can introduce other measures to boost growth. Mario Draghi can decide to pump more liquidity into the financial sector via the LTROs. The ECB has already injected more than 1.0 trillion euros at the end of 2011 and the beginning of 2012 to avert a disastrous breakup of the bloc.

USD

“A number of comments from the panel cite adverse weather conditions as a factor negatively impacting their businesses in January, while others reflect optimism and increasing volumes in the early stages of 2014"

-ISM report

Manufacturing activity in the world's biggest economy rose at a substantially slower pace than expected in January, as new orders growth declined by the most in 33 years, pushing the overall factory activity to the lowest level in eight months, according to data released by the Institute for Supply Management.

The ISM’s manufacturing PMI dropped to 51.3 in January down from a recently revised 56.5 a month earlier, with a reading above the 50 threshold indicating an expansion in the sector. The January gauge marked a second consecutive month of falling growth from November’s recent peak of 57, which had been the highest since April 2011, adding to concerns the U.S. economy may be losing some steam it had enjoyed in the second half of 2013.

The ISM report indicated a broad pullback across many components in the factory sector. The biggest drop was recorded in the forward-looking new orders index, which plummeted to 51.2 from 64.4 in December, the largest monthly fall in that key component since December 1980. Indicators of production, inventory growth and employment also fell from December. The employment reading stood at 52.3, the weakest since June and well below December’s 18-month high of 55.8. In the meantime, the prices index rose to 60.5 from 53.5, the highest reading since February 2013.

GBP

“UK manufacturing made a strong start to the new year, continuing the robust upsurge in production seen at the tail end of 2013”

- Rob Dobson, senior economist at survey compilers Markit

It seems that Mark Carney’s forecasts are working very well, taking into account the fact he predicted a slight deceleration of economic growth in the coming months, even despite the fact the economy is building up steam in general. Hence, it was not a surprise that manufacturing PMI surprised markets to the downside, though still being significantly above the crucial level of 50.

The headline data produced by Markit showed the gauge of activity in the manufacturing sector– one of the key pillars of the U.K. economy, slowed to 56.7 last month from 57.2 in December, however, still being far above the average level of 51.3. Analysts, however, expected a reading of 57.1. Nonetheless, the increasing number of new orders points to more strength ahead for British factories. The pace of growth in new export orders stood at the three-year high over the period amid stronger demand from North America, Europe, Asia, Scandinavia, the Middle East and Brazil.

While manufacturing sector accounts for around 10% of the overall economic output, market’s reaction was very impressive, even though not immediate, with the cable falling to 1.6323, the lowest since January 17. On Wednesday, however, the pair can recover, as activity in the key services sector is projected to improve significantly.

CHF

"It will remain as it is for the time being. The Swiss National Bank is in the comfort zone, given the weak inflation rate in the euro area. That speaks for a stronger franc.”

- Cornelia Luchsinger, an economist at Zuercher Kantonalbank

The SNB should start keeping an eye on the EUR/CHF more carefully, as after hitting a high of 1.2394 on January 8, the pair began its downside movement to 1.2200 level. The Euro was losing ground versus the Swiss Franc amid falling inflation in the 18-nation economy while stronger-than-expected manufacturing output in the Alpine country pushed the pair even lower.

On Monday, a report from Credit Suisse and Procure.ch showed the Swiss manufacturing index stayed in the positive territory, inching higher to 56.1 points in January compared with an upwardly revised 55 a month earlier. The figure recovered from the lowest since June, when the gauge came in at 51.9. Moreover, the index moved higher above the crucial 50-point threshold, which separates expansion from contraction, for last 12 months, pointing to recovery in the Swiss economy boosted by the SNB's currency floor, which eased pressure on exporters, as well as the overall strengthening Eurozone's economy, the largest trading partner of Switzerland.

Improving domestic and global demand, as well as stronger manufacturing output are all bolstering the case Thursday’s trade balance can surprise markets to the upside, pushing EUR/CHF up to the next strong support at 1.2198.

AUD

"There had been further signs of the stimulatory effects of low interest rates, most notably in the housing market, and additional effects were still likely to be coming through”

- The Reserve Bank of Australia

The resource-rich economy is stuck in the transition phase, as investment in the key mining sector begin to wane and during the period of prosperity the government was not able to seize the opportunity of economic expansion, and the economy is struggling to grow. Currently, analysts believe that housing market can become a new locomotive for the Australian economy, but is it that strong enough or the RBA will be forced to make another intervention?

According to a report from the Australian Bureau of Statistics, the number of approvals for the construction of new homes plunged 2.9% in December, following a 0.3% dip a month earlier and posting third straight monthly decline. Moreover, the data surprised markets to the downside, as economists predicted a 0.3% decline. Nevertheless, on a yearly basis the indicator were 21.8% higher, bolstering the case the property market will gain momentum in 2014. Record-low interest rates have definitely helped to boost demand for construction and new housing in the Oz economy over the last year, and taking into account the latest economic data from Australia, the RBA is likely to maintain its loose monetary policy in the foreseeable future. Even despite the latest slump in building approvals, the six months trend is reflecting a pickup in households willingness to build a new home in the back half of 2013.