Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"The downward revision in euro zone consumer price inflation to 0.7% in February and the rise in the euro to a 30-month high just below US$1.40 is ratcheting up pressure on the ECB to act”

-Howard Archer, chief economist at IHS Economics

Inflation has been a key topic for speculation during the last several months, as European policymakers constantly warned about weak inflationary pressure and an existing risk of deflation. Therefore, it was very surprising that markets remained little changed after February’s revised CPI data, with EUR/USD losing only 0.12% and falling to 1.3888.

A monthly report from the Eurostat showed consumer prices climbed just 0.7% on a annual pace last month, down from January’s reading of 0.8% and moving further away from the ECB’s official target of 2%. The consensus forecast stood for no change. With inflation below 1% for five months, Mario Draghi will be under stronger pressure to defend the 18-nation bloc from falling inflation. On a monthly basis, CPI showed mild improvement from prior month coming in at 0.3%, following a 1.1% decline, however, missing market’s expectations for a 0.4% gain. The revisions of the annual CPI brings inflation to the lowest since November 2009 and October’s 2013 level, after which the ECB lowered its key refinancing rate to a fresh low.

The ECB claimed its readiness to act if needed, and according to analysts, the next move will be aimed at adding liquidity. The central bank can stop sterilizing the money it spend purchasing sovereign bonds or launch its LTRO programme.

USD

“From a market perspective, the Fed's decision to drop its threshold-based forward guidance will likely be taken in stride. However, there is the backdrop of recent softer US data, rising geopolitical risks and lingering uncertainty about global growth prospects.”

- Standard Chartered analysts

While the most traded currency pair is changing hands around 1.39 level, with bulls still aiming an important psychological level at 1.40, market sentiment has been strongly bearish during the last several months. At the moment of writing almost 70% of Dukascopy traders were selling the Euro versus the greenback, while American currency was bought in 65% of all cases across the board. This week, the buck has a great potential to regain some of the earlier made losses, since FOMC meeting is expected to provide additional boost to the Dollar as markets have priced in less aggressive tightening so far.

The two-day FOMC meeting is clearly the top highlight for this week, as it will be a significant challenge for Janet Yellen. Her comments coincides with an anticipated adjustment in the central bank’s guidance related to short-term borrowing costs and withdrawal of its stimulus programme. More tapering is on the course, however, markets will keep an eye on any clues about raising interest rates as unemployment rate falls faster than expected. Many economists now believe the central bank will remove the threshold it set for considering a first rate hike, the same as the BoE did. In December 2012, Bernanke pledged to start raising interest rates as soon as unemployment falls to 6.5%, also assuming inflationary pressure will be tame. However, ditching the threshold can confuse market participants and cause a market turmoil.

GBP

“Stamp duty is an unjustified burden on middle income families, especially in London and the southeast. It is also preventing the proper functioning of the housing market, exacerbating the shortage of housing supply”

- Paul Smith, a manager at Haart

While the Sterling stabilized versus the U.S. Dollar on Monday amid the earthquake in LA, Britain’s housing market continued overheating, posing more pressure on the policymakers. The nation’s housing asking price soared to a fresh record high of 256,000 pounds this month, amid spring seller rush. According to Rightmove, values in England and Wales inched higher 1.6% on a monthly basis to 552,530, moving 8,298 above previous high reached in October. On a yearly basis, sellers’ asking prices advanced 6.8%, while London recorded a 11.3% price hike. The only region, where prices posted a 0.3% decline was the North. While investors rushed to buy a property in London, considering it as a safe haven, the company said there is an evidence price growth in the capital is no longer driven by the prime central boroughs.

Britain’s property market is on the mend and it was mostly encouraged by overall economic improvement. Moreover, schemes introduced by the government, like Help to Buy, are allowing potential buyers to purchase a home with a down payment of just 5%. Earlier, George Osborne said the programme will be extended for new homes to 2020 in order to boost construction sector. The government will invest additional 6 billion pounds in the programme, with additional funding projected to support the construction of new 120,00 properties.

CHF

"There will be no official announcement of the SNB on that. It wouldn’t be very clever to announce you’re giving up the cap. It would be too easy for the investors who are betting against it.”

- Manuel Ferreira, a portfolio manager at Zuercher Kantonalbank

With EUR/CHF trading comfortably above the 1.20 level, the SNB can feel almost no pressure until there is a need for market intervention. Nevertheless, domestic economy is sending worrying signs time to time, suggesting the cap is still needed. It seems that strong domestic consumption cannot boost growth on its own as due to a drop in exports of pharmaceuticals, chemicals and machinery the Alpine country almost stalled in the final quarter of 2013. According to a report from the Federal Statistics Office, Swiss gross domestic product expanded 0.2% in the three months through December from the prior quarter when the growth stood at 0.5%.

According to economists, Swiss policymakers will stick to the chosen course for at least another year, providing a chance to read up on their history for ideas on abandoning the cap. Vast majority of respondents in the poll conducted by Bloomberg, showed the SNB will eliminate the cap of 1.20 per euro in 2015 at the earliest. Almost a half, however, believe it will be kept until 2016. The next monetary policy meeting is scheduled for March 20, where no changes are expected to be made. The three-member board will most likely leave the benchmark rate at zero and leave the defence on the Franc unrevised. Amid improving economic conditions in the Eurozone, the pressure of the Franc will wane, and the currency will weaken, providing additional boost to Swiss exporters. The minimum exchange rate has been in place since 1978.

NZD

“Consumers' economic optimism, their assessment of their financial situation and their reported attitudes to spending have all continued to pick up”

- Felix Delbruck, Westpac senior economist

NZD/USD to refresh this year’s high? Why not? Especially keeping in mind extremely positive data from New Zealand. Another fact that supports another rate hike from RBNZ occurred on Monday, as a report from Westpac Banking Corporation showed consumer sentiment rocketed to the highest level in nine years on the back of economic strengthening and hawkish comments from the central bank.

A gauge of consumer mood advanced to 121.7 this month, accelerating form 120.1 in the December survey, soaring to the highest level since credit-fuelled economic growth in 2005 and moving further away from the 100 threshold that indicates optimism. A net 35% of respondents consider the economy will improve in the year ahead, up from 27.8% in the previous report and hitting the third-highest since records began. Consumer mood is on a steady rise as domestic economy is running close to its full capacity, with export commodity prices hovering around record high, while the Canterbury rebuild and booming housing market are adding a significant amount of growth to the key construction sector. The only worrying sign is consumers’ cautiousness about further spending, as households’ spending is expected to remain a passenger as other sectors of the economy will drive the economy to prosperity.