Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"The social situation in the EU shows little signs of improvement: inequalities have risen and the situation of many households and individuals is not improving, with ever growing numbers suffering from financial distress”

-László Andor, EU commissioner for employment

With just a day left before the crucial ECB’s meeting, each piece of fundamental data plays a more important role for the policymakers, who try to assess the state of the 18-nation bloc’s economy. With inflation at the four-year low, everyone hopes that the situation in the labour market will improve, hence, Draghi might refuse from adding fresh stimulus in the struggling economy.

Nonetheless, the unemployment in the Eurozone remained around record highs, even despite the fact the economy is on a stable footing and the worse is over. The overall jobless rate stood at 11.9% in February, unchanged from January’s reading, while still surprising markets to the upside, as investors were betting for a 12.0% level. Although the number of people out of work decline by 35,000 over the period, almost 19 million people are still looking for jobs. High unemployment data do little to help Mario Draghi, who is under pressure amid rising deflation risks.

What is more important, the latest figures highlighted the high level of divergence in employment and social outcomes. The unemployment rate in Europe’s powerhouse remained unchanged, while situation in Italy’s labour market deteriorated further, with the gauge of unemployment soaring to a fresh high of 13.0%.

USD

“The weakness we saw in the very early part of this year is going to abate and we’ll see better growth. We’re making our way back to something that’s more sustainable.”

- Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc.

U.S. manufacturing expansion accelerated for a second consecutive month in March, as production and orders rose despite slowdown in employment growth, triggering off a rise in global stock markets and the U.S. Dollar. The greenback recovered earlier losses against the Euro and Japan’s Yen on the back of the positive news, which adds to signs that the nation’s economy manages to shake off winter slump and builds forward momentum into the June quarter.

The Institute for Supply Management’s index inched higher to 53.7 compared to 53.2 in the previous month, with a reading above 50 pointing at expansion in the sector. Although it came against analysts forecasts for 54.0 and stayed below November’s recent peak of 57, the highest since April 2011, it was offset by a positive Markit PMI data showing that the U.S. manufacturing sector continues to expand at a solid pace. A strong increase in manufacturing output levels throughout March was mainly driven by a sturdy domestic demand.

Separately, according to the Commerce Department, U.S. construction spending barely increased in February, edging up 0.1% to an annual rate of $945.7 billion, in line with analysts expectations. January’s reading was revised to a 0.2% decline instead of the previously reported 0.1% increase.

GBP

“Growth is merely hot rather than scorching, and the take-home messages from the March survey are that the recovery remains solid and continues to drive strong job creation”

- Rob Dobson, senior economist at Markit

As always the first week of each month includes three important economic reports from the U.K.– manufacturing, construction and services PMI. While the first two sectors account only around 10% each, they still have a significant impact on markets, as companies react quickly to any changes in market conditions. This time, the reaction was very impressive, with the cable plunging to 1.6639 immediately after the release of the data, while earlier the pair was trying to refresh daily’s high at 1.6674.

The main reason for such a disappointing performance was weaker-than-expected manufacturing PMI released by Markit. The company said a gauge of activity in the manufacturing sector slowed to 55.3 in March, hitting the lowest since July, and down from a revised 56.2 a month earlier. Economists, however expected the figure will move further away from the 50 mark that separates growth from contraction. The main downside pressure came from exports, that fell to the lowest in 10 months.

While some can call these figures as an alarming sign, they echoes with official projections that the growth will slow in the second half of this year. Moreover, inflation fell to a fresh four-year low in February, while price pressures in manufacturing sector cooled as well.

JPY

“There isn’t much reason for companies to be optimistic. The sales-tax hike is going to drag on the economy, and exports have been weaker than expected on the back of a slow global recovery.”

- Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co.

Sentiment among Japanese manufacturers soared to its highest level since 2007 in the first quarter of this year, suggesting companies feel confident about the economy due to all efforts from the government, a survey from the Bank of Japan showed. A gauge of sentiment rose to 17 in the first three month of 2014, following 16 a quarter earlier. Nevertheless, the data missed analysts’ forecasts, who expected a figure of 18. Any reading above zero indicates improving conditions in the sector. A measure of financial position gained as well, while employment conditions deteriorated due to the low unemployment rate, which is making it more difficult for employers to find skilled workers. Following the report the nation’s Finance Minister Taro Aso claimed that Abenomics are having a positive effect on the economy.

Gains in the manufacturing, however, are likely to be short-lived, as analysts project the index will drop to 8 in the June quarter. It is expected that April’s first consumption tax hike to 8% will become a burden for domestic households and companies, and will cool down demand. The next several months will be key in whether Shinzo Abe will proceed with the planned further revision of the sales tax to 10%, while the central bank will have to decide whether additional stimulus is required. Currently, analysts believe May’s meeting will be the most appropriate time.

AUD

"The decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months.”

-Glenn Stevens, RBA Governor

As it was widely expected the Reserve Bank of Australia decided to keep its key refinancing rate at 2.5%, keeping it there for the eight consecutive month already. It means the central bank will stick to its pledge the monetary policy will remain unrevised for some time, as a period of stable rate is required to help the economy adjust to lower investment levels in the mining sector. The RBA believes that record-low interest rates as well as the lower exchange rate of the nation’s currency will help the economy to finally emerge from the transition phase and find new solid drivers that can lead to prosperity. While some economists believe the next move from the RBA will be a rate hike, as the easing cycle is over, Stevens’ comments that the Aussie is still at the “high by historical standards”, suggested there is still a possibility the RBA will pull the trigger once again.

The AUD/USD pair has found a strong resistance around 0.93 and following the RBA’s meeting, the pair first shot to 0.9303, while next retreated back to 0.9262. The pair has performed a strong rally since 2001 and experts are wondering when it will be over. Some consider 0.80-0.85 level during next 12-18 months, while others believe the pair has a potential to soar to the October 2013 high at 0.9750 over the same period of time. Moreover, the wildest guesses stand for the parity level.