Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"The euro-zone inflation rate fell in March to 0.5% and core inflation dropped to 0.8% This should fuel the deflation debate. Even so, the ECB is unlikely to lower the interest rate at its council meeting on Thursday in our view, as the inflation rate should rise again to 0.9% in April.”

-Commerzbank

Brace yourself. Fresh actions from the ECB is coming. Back in November, when inflation hit 0.7% the central bank cut its key refinancing rate to a fresh record-low of 0.25%. With inflation at the lowest level in four years markets are preparing for a radical measure that will most likely to be introduced this Thursday.

A report from the Eurostat showed consumer prices stood at 0.5% last month, down from 0.7% in February and hitting the lowest level since November 2009. Moreover, it is 0.1% lower than the value expected by markets. Core inflation, which is considered as a less volatile measure, also eased in March, reaching 0.8% following a 1.0% gain in the preceding month. That puts the inflation well below the official target of 2% and marks the sixth straight month when the rate hovered below 1%. The figure intensifies concerns about deflation risks in the 18-nation bloc, that can drag the region into another recession. Nevertheless, this is just a flash estimate, meaning it can be revised later.

While the latest figures raise fears about Japan-style deflation nightmares that were affecting the economy for decades, analysts expect a rebound in April, hence, even despite alarming reading the ECB may postpone its decision until the next month’s meeting, and only claim its readiness to act if necessary.

USD

“The economy is shaking off the negative impacts from the weather. We're beginning to see signs that growth is going to gain some traction and strengthen and accelerate as the year progresses.”

- Sam Bullard, a senior economist at Wells Fargo Securities LLC

A former CEO of PIMCO Mohamed A. El-Erian considers that a financial support for Ukraine can threated American stocks, resulting in a more serious consequences to the economy. Moreover, last week’s report showed the economy was not able to meet its GDP target. What is currently happening with the world’s largest economy is something similar to a recovery from a serious illness. At first, doctors believe the patient start to return to normal, however, later the patient can suffer from a permanent damage that can have a devastating effect on the health.

While economy is still expanding at a stable pace, further slowdown can be an alarming sing. Stronger growth makes both public and private goals more achievable for the government, while slower growth can become a drag on living standards. It will make harder to reduce the budget without any tax hikes, while also pose a threat to the inflation. All this makes it more complicated for the Fed to continue tightening its monetary policy. While Janet Yellen sounded very confident last time, hints about the upcoming rate hike were not able to provide a significant boost to the greenback, with EUR/USD still trading around 1.38. Additionally, experts are not univocal in their assessments, as Moody’s Analytics believe the GDP will accelerate to 3% this year, economists from Morgan Stanley lowered their forecasts to 2% from 2.5% expected earlier.

GBP

“Businesses have begun 2014 in positive mood, with activity in the manufacturing sector and across the wider economy expected to rise at a healthy clip in the first quarter”

- Neil Prothero, deputy chief economist at EEF

With only 13 months left before the elections, Britain’s politicians will try to do whatever it takes to convince their electorate they are able to lead the economy to a long-term prosperity. George Osborne in particular is trying to rebut critics within his own party that blame him for not making enough tax cuts and providing support for the middle-class voters.

In attempt to regain the lost confidence, Osborne claimed that the upcoming tax cuts mark the return of stability and confidence in the U.K., bolstering the case the economy will continue building up steam. The reforms include a 1% reduction to the corporation tax that will be revised to 21%, while in 2015 it is set to be reduced to 20%. Such a privilege became possible amid stronger investment and reductions in business rates. At the same time, Osborne will be under scrutiny from the Labour, who claims he ignored the constantly increasing cost of living.

Osborne also pledged to fight for the full employment, making job creation a key pillar of the government’s economic plan. These comments echoes with the central bank’s aim to eliminate the remaining slack in the economy that will allow Carney to start raising interest rates. A growth in wages and productivity were earlier claimed the main priorities for the Bank of England.

JPY

“Companies are already cutting production and managing their inventory well, so the fall-off in the second quarter should be modest”

- Kiichi Murashima, chief economist at Citigroup Inc.

The world’s third largest economy feels more and more pressure from the looming tax hike that will be made on April 1. Another evidence the economy can be dragged into recession unless the central bank will pull the trigger once again and introduce a fresh round of the quantitative easing.

Japan is highly dependent on the manufacturing and industrial sector as Japan is known as an export-oriented economy. This week’s report is a preliminary data, while the revised figure will be unveiled only 15 days later, therefore, the prelim data has the most impact on financial markets. The USD/JPY currency pair climbed above 103 level for the first time since March 12, as the Ministry of Economy, Trade, and Industry posted disappointing industrial production figures. The nation’s industrial activity sank 2.3% on a monthly basis in February, following a 3.8% surge a month earlier, and missing analysts’ expectations for a 0.3% pickup. On a yearly basis, however, the output advanced 6.9%.

The so-called Abenomics consist of unprecedented fiscal stimulus, rapid monetary easing, as well as a set of structural reforms, which are all aimed at ending some 15-years of deflation. Due to Abe’s efforts, growth has picked up around 1% last year; however, the economy is not ready yet to withstand a knock to demand from the consumption tax hike.

NZD

"With the economy now firmly into an economic expansion and interest rates on the ascent (a net 86 percent expect them to move up further), the challenge is to settle into a glide-path”

-Cameron Bagrie, ANZ's chief economist

The kiwi touched a one-year high against the greenback once again on Monday after a series of reports showed the economy will continue gaining momentum in the coming months. The New Zealand currency was buying 0.8676 U.S. Dollars, gaining 0.3% on the day and hitting the highest since April 2013. More and more analysts already consider the currency is overbought, and can become a serious drag on the economy in the nearest future, hence, investors are making their bets on when the rally will be over.

A gauge of business confidence took a small hit last month, as a more tightened monetary policy raised concerns about companies’ future profitability. The ANZ Business Outlook survey showed a net 67% of the nation’s businesses remained positive about economic prospects, down marginally from 70% in the prior month. The main reason for a deterioration was a 5% drop in the expected profitability over the observed period, while the expectations of hiring more staff posted the same decline.

Earlier on Monday the nation’s statistics bureau said the number of building consents jumped by 3%, providing the first boost to the kiwi. Amid plenty of other evidence the economy is on the path to prosperity markets are focusing more on the emerging inflationary pressure that can force the central bank to introduce another rate hike soon.