Daily Forex Fundamental Overview

Fundamental Analysis

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

The Euro and the greenback were two the most attractive currencies for investors last week, with such crosses like EUR/SEK, USD/SEK, USD/RUB and EUR/CAD soaring 1.93%, 1.89%, 1.75% and 1.64% respectively over the last five trading days. At the same time, investors were able to earn even more by investing in XAG/USD (+4.03%), Nikkei 225 Index (3.12%) as well as Britain’s benchmark index FTSE-100 that rocketed 2.97% over the week.

As it was predicted earlier the cable was highly affected by fundamental news from the U.K., such as MPC votes, BOE’s comments and data from the nation’s labour market that all pushed the Pound lower. On a hourly chart the cable has formed a falling wedge pattern after hitting 1.6823 on February 17. During the whole week the pair was moving in pattern’s boundaries, but it seems it will be extremely difficult for bears to push the pair below a weekly pivot and 200-hour SMA at 1.6639. Moreover, after inching slightly below this level the pair soared even above pattern’s resistance, suggesting the depreciation will be short-lived. This week markets will focus on the BoE’s inflation report on Tuesday and second GDP estimate a day later. Moreover, on Friday Mark Carney will participate in a panel discussion at the Symposium on Financial Stability and the Role of Central Bankers. Keeping in mind central bank’s confidence about economic growth, they are likely to confirm the ongoing recovery and most likely will fail to assure markets the policy will remain accommodative for some time in the foreseeable future. Therefore, the Pound is projected to strengthen versus other major currencies during the week, while the cable can aim this year’s high at 1.6823.

The most traded currency pair is still trading in boundaries of a channel up pattern that can be found on a 4H and 1H charts. The pair was bounded in a 87-pip range last week, refusing to go above or below 1.37 level. Nevertheless, it seems that 1.3683 is a key level for short traders and as long as the pair hovers above it, the outlook is bullish. While almost 66% of Dukascopy traders are holding short positions on the pair, 59% of all pending orders are placed to buy the pair, while trader Valen920 believes the pair will hit 1.3810 by this Friday, February 28. The pair has a potential to perform a strong rally this week, as the greenback will most likely remain under pressure until the release of the U.S. Q4 GDP data that is expected to show the economy has lost the momentum over the corresponding period. The world's largest economy has been reporting weak data from practically all sectors of the economy, including the labour and housing markets. Nevertheless, the Fed has expressed only hawkish comments, saying they will start raising interest rate as soon as the unemployment hits 6.5%, citing broadening economic recovery. However, even Fed’s confidence cannot push the GDP higher, hence the U.S. Dollar is projected to decline this week, with the EUR/USD first aiming 1.3758 and in case it is breached than 1.3810 will be put on the map.

EUR

"The German economy is actually in quite a good shape looking forward. That is also good news for the euro area as a whole."

- Natascha Gewaltig, director of European economics at Action Economic

The single currency received a strong bullish impetus on Tuesday that pushed EUR/USD to 1.3763. The pair is approaching a strong resistance at 1.3773, and in case it is breached 1.3712 will be put on the map.

The main reason for such a strong performance is optimistic data from Europe’s largest economy, Germany, while even strongly bearish market sentiment (67%) was not able to limit pair’s appreciation. The country that has been a locomotive for the whole 18-nation bloc since the creation of the union expanded 0.4% in the quarter of 2013. The reading came in line with previous estimations. On a yearly basis the economy posted a 1.3% growth, also meeting forecasts and accelerating from 1.1% three month earlier. The main contribution came from exports, with foreign sales expanding 2.6%, while equipment and construction investment each moved higher 1.4%. With business mood around the highest in 2 1/2 years and unemployment fluctuating at a record low, German economy is providing a boost to other European countries, with the bloc being German largest trading partner. Tuesday’s reading can help Mario Draghi decide whether additional stimulus is required.

Still the recovery is not balanced, as the economy should move away from export domination to a stronger consumer sector and domestic demand.

USD

“While expectations have fluctuated over recent months, current conditions have continued to trend upward and the Present Situation Index is now at its highest level in almost six years”

- Lynn Franco, director of Economic Indicators at the CB

Is it just severe weather conditions that weighed on the U.S. economy in the last months or it is a more complicated issue that should not be shrugged off by the Fed? On Tuesday the Conference Board said a gauge of consumer mood dropped to 78.1 this month from a downwardly revised 79.4 a month earlier and falling short of analysts’ expectations for a 80.0 reading. The company explains such a disappointing figure by a steep decline in the expectations index that plunged to 75.7 over the period compared with 80.8 in January. The data means that the economy has improved in the recent months, however, households are still concerned about the future, and do not expect a rapid growth. Consumer spending is the linchpin of the world’s largest economy, however, Americans have not been increasing their spending by much during this year’s harsh winter. Therefore, retail sales surprised markets to the downside as well. As consumer spending represents the biggest part of the economy, Friday’s GDP report can show economy has lost some of the momentum.

Later this week the Fed Chairman Janet Yellen will complete her snow-interrupted inaugural testimony to the Congress. It seems highly possible that Yellen will try to elicit her personal views about the strength of domestic economy, the reasons for inability to create jobs as well as shed light on how the central bank’s tapering will affect the domestic and global economies.

GBP

“We are growing businesses. We are creating jobs. If the Government is looking for a sector to kick-start growth and rebalance the economy then they should start by looking at agriculture.”

- Peter Kendall, NFU president

The U.K. economy is expanding; however, the recovery is considered to be unbalanced, as growth was mostly led by a steep decline in the household savings rate, hence future prospects can be cautious and treated carefully. Moreover, one of the key drivers was the housing sector, which is overheating and risks creating a bubble that will derail economic growth. Therefore, the government should be looking for a sector that can guarantee a long-term prosperity.

It can be surprising for some, but agricultural sector’s contribution to the economic growth rocketed 54% between 2007 and 2012. The survey titled Backing the Business of British Farming showed the farming sector contributed 8.6 billion pounds to the GDP in recent years. The figure is significantly higher that the one recorded between 2003 and 2007, suggesting the role of the sector is increasing. Moreover, food and drink is currently the nation’s fourth-largest export sector, growing by 2.5% in the first half of 2013. The sector has been battling for survival in the recent years, as farmers were suffering from heavy rain, drought, unseasonable snow and flooding across the whole country in the recent weeks.

Agricultural sector has a potential to drive vital economic growth as it has proven its resilience through the deep financial crisis and severe weather conditions.

JPY

“If the risks you have mentioned ever materialize, we will not hesitate to adjust the current quantitative and qualitative easing”

- Haruhiko Kuroda, BoJ Governor

Bank of Japan Governor Haruhiko Kuroda is keen on simple, easily digestible language to explain complex monetary policy and central bank’s actions to support growth. The chosen strategy has already succeeded in maximizing the psychological impact of each move.

During the last week’s meeting the central bank announced the doubling of its funding tool to 7 trillion yen, saying private banks will be able to borrow twice as much low-interest money as earlier under a second facility. Such a measure helped turn around the sentiment among investors, boosting Japanese indexes higher and pushing the Yen lower. The move was widely expected by markets as it follows disappointing data showed a slowdown in the nation’s economic growth. Nevertheless, the simplification of Kuroda’s communication approach does not mean he focuses on just one set of data-GDP report. People close to the central bank said the BoJ will chose its course of future actions after examining the growth for the current financial year ending in March. In case GDP will be below 2.7% official projection the central bank may be willing to respond to economic slowdown by introducing fresh stimulus. In case Kuroda means what his comments suggests, that additional stimulus is practically inevitable, taking into account the economy posted a 1% growth in the final quarter, well below markets’ forecasts. In case it will not be upwardly revised, the economy will have to grow around 10% in the January-March period to meet the target.

NZD

"It's unlikely that the latest survey will have much bearing on the RBNZ's decision to begin raising the OCR at its next review in March, but it does underscore that the RBNZ has some work to do to re-establish the credibility of its inflation target.”

- Michael Gordon, senior economist at Westpac Banking Corp.

During the last policy meeting RBNZ Governor Wheeler reiterated his pledge to start increasing interest rates soon, also mentioning the necessity to gather more information in order to asses the economy's outlook in March, bolstering the case of March's rate hike. Stronger inflationary pressure and the hike of the interest rates that would accompany them will definitely send the kiwi higher, reducing the competitiveness of the nation's exports and import substitution industries. Policymakers also pledged to start increasing rates as soon as inflation moves towards the midpoint of the central bank's 1-3% target band.

Tuesday’s report, however, showed inflation will average 2.3% during the next two years, hovering at a level slightly above the mid-point of the central bank’s target range. Regarding the short--term outlook, consumer prices are expected to stand at 2% in the year ahead. The survey from the central bank also showed in the coming quarter the CPI will rise 0.49%, slightly lower than respondents expected a quarter earlier. Graeme Wheeler warned that inflationary pressure is projected to increase over the next two years, even though the headline inflation has been moderate so far. Rising inflation expectations from companies as well as a drop in the unemployment rate will help employees to bargain for higher wages, hence, putting additional pressure on inflation.