Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"It is important for us, and especially for Greece, that the troika and the Greek government arrive at an agreement very soon”

- Jeroen Dijsselbloem, Eurogroup chief

While the single currency shifted further away from it recent highs against the U.S. Dollar on Tuesday, the pair can receive another bullish impetus later this week. European finance ministers are pushing for Greece to complete negotiation talks over the nation’s next bailout plan with international lenders. Troika suggests talks should finish by the end of this week, and it will mean an end of the review that started in September. European leaders have been expressing their disappointment with the lack of any progress with structural reforms implementation in Greece, although they agreed that the highly-indebted country is now on much sounder ground than earlier. During the meeting, ministers have already approved a 150-million euros worth financial package for Cyprus. At the same time, Greece is struggling to meet requirements about recapitalization of the domestic banks.

Another positive aspect of the meeting in Brussels is a substantial progress about the Single Resolution Mechanism. Ministers broke a deadlock on European bank-failure law that was urgently sought by the ECB. While questions about how quickly the fund will be build and when and how will tap financial markets, any progress or a compromise would mean further stability in the 18-nation bloc, hence, the shared currency will be able to rocket above 1.39 and head towards 1.40 level.

USD

“The view that I am using ... implies a relatively fast growing economy, increasing rates of inflation, much higher interest rates, and a move back to recession by 2018”

- Dick Bove, vice president of equity research at Rafferty Capital Markets

On Monday banking analytic Dick Bove claimed the world’s largest economy will fall into recession, as the rate of money flow and inflation will become a massive drag. He expects a 7% rate in the 10-year Treasury will put a severe crimp in the debt-happy economy. However, it can happen not sooner than in four years.

In contrast, the White House expects more robust growth this year rather than was recorded in 2013, while in 2015 growth is likely to pick up. The current projection stands for 3.1% in 2014, compared with 1.7% last year. Moreover, the pace of economic expansion will accelerate to 3.4% next year. Additionally, the unemployment will most likely ease to and average of 6.9% this year. In January the jobless rate turned lower to 6.6%- the lowest in more than five years. Despite these bright forecasts, the recent drop in unemployment was mostly led by the fact many people have stopped looking for job, with the participation rate having fallen to 63% from 66% seen before the start of the recession.

While economy is on the mend and is definitely sending optimistic signs, the administration is concerned that Obamas’s low approval rating as well as Democrats’ falling popularity can derail economic growth and further improvement in the labour market and economy in general.

GBP

“Improving global growth should help UK manufacturers' export orders as 2014 progresses, although the upside for export orders may well be constrained by domestic demand in the euro zone improving gradually”

- Howard Archer, IHS Global Insight's

The cable remained around a two-week low on Tuesday following mixed data from the U.K. industrial sector, while markets were focusing on the MPC members hearing amid latest allegation of manipulation on the financial market. On Monday the Sterling managed to appreciate only against the Japanese Yen, while lost almost a half per cent versus the single currency and the greenback.

Last week’s Markit report showed manufacturing activity expanded in line with analysts’ forecasts in February. The latest data, however, showed that the nation’s factory output expanded above analysts’ forecasts in January, in a sign of the ongoing recovery. Production rose 0.4% from December, when it advanced an upwardly revised 0.4%. The figure was stronger than analysts expected. A broader industrial production, which includes the value of output by manufacturers, mines and utilities, posted a modest 0.1% growth instead of 0.3% expected by markets and down from December’s 0.5%. While figures also showed that employment stood at the highest since May 2011, the total output is still 10% below its pre-recession peak.

Earlier this week the British Chambers of Commerce pointed out that manufacturing production plays a significant role in sustaining Britain’s economic recovery. A persistent strength of the Pound, however can become a problem for the U.K. manufacturers.

JPY

“Japan’s economy has continued to recover moderately, and a front-loaded increase in demand prior to the consumption tax hike has recently been observed"

- The Bank of Japan

Monthly meetings of the Bank of Japan were usually shaking markets, as any dovish or unconvincing comments from the central bank provided a massive sell-off of the Japanese Yen, as investors are making their bets about when more stimulus will be announced. With only one month left before the looming tax hike, the central bank is starting to worry about the future outlook, even though they decided to stay pat on its policy during March’s gathering.

The Bank of Japan announced its readiness to continue increasing the monetary policy at the rate of 60-70 trillion yen per year, in attempt to end a decade-long stretch of deflation and subdued growth in the world’s third largest economy. Governor Haruhiko Kuroda is expected to face the biggest obstacle to hit his bid of achieving 2% inflation, as the first tax hike in 17 years squeezes companies’ and households’ spending. What is more important is the fact the central bank has lowered its exports outlook in an alarming signs global demand will continue to disappoint. At the same time, however, policymakers raised its forecast on capital expenditure and sounded more confident about industrial production, suggesting domestic demand will still be improving even despite the consumption tax hike.

Analysts believe Kuroda will introduce fresh stimulus around the middle of this year, as it will be harder to reach the 2% inflation goal.

AUD

"People have just got too excited about the likelihood that economic indicators are turning. They are not turning in the job market yet”

- Alan Oster, the bank's Melbourne-based chief economist

RBA’s comments about a period of stable interest rate and exchange rate as well as less dovish comments from Glenn Stevens failed to boost business confidence in February. According to the National Australia Bank, a gauge of business mood fell to 7 last month from 9 a month earlier. At the same time a measure of business conditions slipped to a neutral level from 5 in January, reverting back to levels previously seen several months ago, when strong Aussie was causing headaches for companies. The weakest spots were sales and unemployment, suggesting the situation in the labour market will not pick up any time soon, as Australian entrepreneurs are still reluctant to hire new staff amid current economic conditions.

This year’s first reading was the highest in almost three years and raised hopes for a turning point in the resource-rich economy that is stuck in the transition phase, as investment in the mining sector began to wane. While Australia is in its 23rd straight year of expansion, the growth is slowing down. In the final quarter of 2013 the economy expanded just 2.8% from 4% seen during early 2012. The unemployment rate has risen to 6%, hitting the highest level in more than a decade, and according to the RBA the improvement will not come soon. A further deterioration in the business conditions is suggesting below-trend growth in the first three months of 2013, with GDP expanding around 2.75% and further weakness in the second quarter.