Daily Forex Fundamental Overview

Fundamental Analysis

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

Two policy meetings, minutes from the BoJ and FOMC, and important unemployment data from Australia. All these events were not able to cause a significant market turmoil, as elevated market volatility was recorded only in 27% of the time. Nonetheless, XAU/USD, AUD/USD and NZD/USD posted solid gains, each advancing 2.10%, 1.91% and 1.86%, respectively.

The U.S. Dollar received a strong bearish bias last week, as the FOMC minutes showed officials are concerned over low inflation rate in the U.S., as they had predicted that a strengthening U.S. economy would boost inflation from 1% towards the healthy 2% target, associated with a robust business activity. However, the harsh winter weather undermined their expectations, as it dampened economic growth in the world's number one economy. It means that the first rate hike can be postponed, hence, investors’ interest in the U.S. Dollar deteriorated. In contrast, the Aussie soared, as statistics from the nation’s labour market surprised markets to the upside. Earlier, the RBA projected the unemployment rate will move higher soon, as demand for the labour force remain fragile. Investors sent the Aussie to a 4 1/2 month high, as the unemployment rate unexpectedly fell to 5.8% in March from a revised 6.1%. Moreover, this week, the RBA will publish its minutes on Tuesday, where they can specify their intentions to keep rates on hold and, perhaps, show that the next move will be a rate hike, not another cut, as some economists believed. In this case AUD/USD can easily rocket to its previous high at 0.9465 and continue its appreciation toward 95-mark and a monthly R2 at 0.9556. However, gains can be limited, as technicals on a daily and weekly charts are already suggesting the pair is overbought, while aggregate technical indicators on a monthly chart are sending ‘sell’ signals.

Another South-Pacific currency, the kiwi, can be highly attractive this week, as on Tuesday the Statistics New Zealand will unveil first quarter’s inflation, while Chinese GDP a day later will shed light on the real state of the world’s second economy. Inflation at 2.4% is raising concerns the People’s Bank of China can pull the trigger soon, boosting domestic demand. New Zealand is highly dependent on demand from its largest trading partner, hence kiwi will be highly volatile after the release of two reports. Long trader should focus on a recent high at 0.8746, while the key support is located at the level represented by a weekly pivot at 0.8609.

EUR

"The emerging market turbulences and the cold winter in the US may have at least temporarily prevented further growth in export orders"

-Christian Schulz, senior economist at Berenberg Bank

Europe’s powerhouse continues to disappoint… Still, it is not a question that the German economy is the star of the Eurozone, with its low unemployment, robust growth and relatively low debt level. Nonetheless, the latest data raised concerns about the resilience of the German economy, and while officials claim the worse is over, further weakness can be transferred to other countries and lead to a second wave of crisis.

Friday’s report confirmed that the rate of inflation in Europe’s largest economy fell to its lowest level in more than three years last month. The costs of living in Germany advanced 1.0% on a 12-month basis, turning lower from 1.2% in February. The last time inflation moved even lower was in June 2010. When using the Harmonised CPI index, which is the ECB’s inflation yardstick, the inflation stood even lower– at 0.9%. On a monthly basis, inflation increased only 0.3% following February’s 0.5%. Earlier last month, analysts claimed the CPI will stand at 0.4%, meaning the reality was even more disappointing.

German inflation has an especially noticeable market impact, as the economy represents a majority of the overall Eurozone output. While Draghi claimed policymakers are considering the implementation of fresh measures, not everybody is that convinced they will act in the coming months.

USD

“Economic news reaching consumers grew more favorable in early April”

- Richard Curtin from the University of Michigan

Following the impressive rally that was provoked by dovish FOMC minutes, EUR/USD moved slightly lower on Friday, as the greenback finished the week on a high note. Despite hopes the ECB will launch the U.S.-style soon, cautious comments from Janet Yellen provided a massive sell-off of the buck, as winter has stronger-than-expected effect on the economy. After moving above 1.39-mark, the most traded currency pair fell back to 1.3863.

The main reasons for a short-lived strengthening of the Dollar were upbeat consumer sentiment from the University of Michigan and stronger-than-expected PPI from the Labor Department. The first report showed that a gauge of consumer sentiment reached 82.6 in April, accelerating from 80.0 recorded in March and hitting the highest since July. A measure of consumer expectations picked up to 73.3 from 70.0, while the barometer of current conditions advanced to 97.1. The figures mean that consumers willing to spend money, providing additional boost to the economy, as households spending accounts for 70% of the economy.

Another positive sign for the Federal Reserve was a stronger-than-projected improvement in the producer prices. The 0.5% increase in wholesales was the biggest since June and followed a 0.1% gain a month earlier. Until inflation moves closer to the official target, the Fed will keep borrowing costs at current level.

GBP

“In the UK, we have those conditions in place, and our economy has grown faster than any other in the G7 over the last year and is now forecast by the IMF to do the same in 2014”

- George Osborne, Britain's Chancellor of the Exchequer

Earlier in April, the IMF claimed the U.K. will be the fastest-growing economy in the G7 this year. The International Monetary Fund upgraded its growth forecast for the U.K., saying the economy will expand 2.9% this year. At the same time, Christine Lagarde warned that the recovery is not supported by business investment and exports and the economy should decrease its reliance of consumer spending.

These forecasts found a support in George Osborne’s speech, who claimed the economic stagnation will not return to the country, saying “best days lie ahead”. The Chancellor of the Exchequer will use his speech in Washington to deliver the most promissing message about optimistic economic forecasts. His comments can boost investors’ confidence, suggesting the U.K. will finally be able to record a solid inflow of investment. At the same time, further spending cuts are still essential for the economy in order to secure its prosperity.

Less than a year ago, during the spring meeting, British economy faced a risk of entering a triple-dip recession. At that time the IMF claimed the government should change tack and introduce more spending. Now, with the economic turnaround surprising even official estimates, Osborne will be ready to answer all sceptics.

JPY

“Japan's economy is expected to continue a moderate recovery as a trend, while it will be affected by the front-loaded increase and subsequent decline in demand prior to and after the consumption tax hike”

- BoJ minutes

While the USD/JPY pair gave up its monthly high on Friday, the minutes of the latest Bank of Japan meeting confirmed that a set of measures to boost growth and deflation is working. All the BoJ members believe there is an ongoing moderate recovery, which is expected to continue. Board members also pointed out the world’s third largest economy appears to finally be on the right track in its battle with decade-long deflation, as latest figures point at a pickup in consumer prices. One of the members also claimed that Yen’s depreciation is boosting inflation more than initially was thought, saying both the CPI and economic growth are moving completely in line with the BoJ’s scenario.

The previously-mentioned facts were widely expected by markets, but what is more important is the remark about the potential impact of the recently-made consumption tax hike. Currently, board members do not wish to undertake any action to prevent a slowdown provided by a tax increase. Amid main risks to economic stability, central bankers mentioned only developments in the emerging and commodity-exporting countries, fragile European economy and the pace of recovery of the United States. Simultaneously, the central bank revised upwardly its exports outlook and the assessment of the industrial production and investment. It means that domestic demand will continue accelerating, while the economy can be hit by global risks.

AUD

"Inflation remains very low in China and growth is still the concern. The pressure on the central bank to loosen monetary policy will grow.”

-Xu Gao, chief economist with Everbright Securities Co.

After a 5-day rally last week, the Aussie lost most of its earlier made gains on profit taking and disappointing data from the world’s second largest economy. The AUD/USD pair left the 94 area and traded 0.31% lower on Friday, fluctuating around 0.9372 at the time of writing. Last week, Australian currency received a strong support from the nation’s employment data and weaker American currency, which was dragged lower by dovish FOMC minutes.

While the currency can be considered as an overbought and trader will close their positions, weak data from Australia’s biggest trading partner, China, added to concerns that the growth will be muted. The resource-rich economy exports to China mostly iron ore, coal and liquefied natural gas. Shipments to the Celestial country helped Australia to escape the worst effects of the global financial crisis over the past several years. Many of Australian mining companies are heavily dependent on demand from China, hence, any pickup in Chinese growth can boost weakening key mining sector.

Chinese inflation rose 2.4% in March, accelerating from 2% in February, however, still staying below the official target of 3.5% and missing analysts’ expectations for a 2.5% growth. The main reason for weak inflation was a 2.3% drop in producer prices. The latest data reinforced the view that the People’s Bank of China will add fresh stimulus soon.