Daily Forex Fundamental Overview

Fundamental Analysis

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

The key highlight of the previous week without any doubt was Germany’s World Cup victory, underscoring its supremacy not only on the European economic and political arena, but also in the football world. Mario Goetze made history in a tight and tense final, ending Germany’s 24-year wait for another World Cup and delivering the country its fourth World Champion title. Such a positive news followed a discouraging economic data, as last week German trade figures fell more-than-expected, following other soft numbers that added to signs Europe's number one economy is losing steam. On top of that, industrial production in France, Italy and the Netherlands surprised sharply to the downside in May, joining Europe's powerhouse Germany, which earlier this week reported output suffered the biggest monthly drop in two years in May, casting further doubts over the Euro zone's prospects for recovery this year. Thus, in order to spur growth in the Euro area Mario Draghi, the ECB President, articulated a new set of rules on economic reforms that the Eurozone member states should adopt to narrow economic differences between the countries.

Elsewhere, the IMF Director Christine Lagarde poured cold water on the U.S. economy strength, as she said a pick-up in economic activity could appeared to be less robust than projected amid lower levels of investment and that risks remain in the U.S. even as its growth recovery accelerates. Nevertheless, the U.S labour market continues to strengthen, with the unemployment rate falling to 6.1% , a six-year low, spurring speculation on timing when the Fed should consider raising rates. Also, minutes from the last FOMC meeting showed that the Fed is ready to end QE in October, provided the economy continues to improve as the central bank expects.

Meanwhile, the Bank of England left its interest rates and asset purchase target unchanged last week despite criticism that policy makers send mixed signals on when borrowing costs will eventually start to rise and amid concerns that a strong Pound may choke off a recovery in Britain's economy. Thus, the MPC agreed to hold off on adding to the 375 billion pounds of asset purchases and leave its benchmark interest rate at an ultra low of 0.5%.

The greenback fell to one-week lows versus the Euro earlier in the week after Wednesday’s minutes of the Fed’s meeting indicated that interest rates are unlikely to rise soon. The Euro, however, remained under pressure as a plethora of weak economic data fuelled concerns over the outlook for the Euro zone’s recovery, with EUR/USD trading at 1.3606 late Friday. The Pound inched lower versus the Dollar on Friday after weak U.K. construction data but remained supported above the 1.71 level, not far from almost six-year high.

EUR

“The take-up should be large -- the money is cheap and banks should feel no stigma about accepting a free lunch”

- Alan McQuaid, chief economist at Merrion Capital

ECB President Mario Draghi’s testimony is scheduled for today’s evening at the European Parliament in Strasbourg and economists expect that the newest stimulus tool announced by Draghi will deliver more than 700 billion euros of cheap funding to banks. The targeted lending scheme for banks is seen spurring credit for the real economy as planned, and help provide the region’s financial system with abundant cash. Lending to companies and households has been identified as a key weakness in the Euro zone’s fragile recovery. The TLTRO programme offers four years of low-cost funding tied to bank lending that could provide as much as 1 trillion euros. The TLTRO will run alongside the stimulus measures that the central bank announced after its June 5 policy meeting, including a negative deposit rate and an extension of unlimited short-term liquidity until at least 2016. After the July meeting, Draghi reiterated his pledge that rates will stay unchanged for an extended period.

Meanwhile, German Chancellor Angela Merkel believes that turmoil in global markets caused by Portuguese bank Banco Esperito Santo SA last week highlights the Euro zone’s fragility and indicates the need for governments to respect debt and deficit limits. Merkel’s comments was a renewed message to France and Italy to restrain from softening the Euro region’s rules.

USD

“We are on a path that says low for long and we have no plans to raise interest rates anytime soon, yet as the data keeps telling us, we ought to be raising rates”

- Charkes Plosser, Philadelphia Fed President

Federal Reserve presidents differ on whether a drop in the U.S. jobless rate to the six-year low warrants advancing the timing for an increase in interest rates. While Philadelphia Fed President Charles Plosser believes that the Fed might lose credibility and control of inflation by waiting too long to hike rates, and positive economic data already suggest a need tighten monetary policy, Chicago’s Charles Evans and Atlanta’s Dennis Lockhart say that low inflation and slack in the country’s labour market provide the bank with time till the second half of 2015 or 2016. Lockhart warned against pulling the trigger too soon, arguing there is still not enough evidence the Fed is close to achieving its twin goals of maximum employment and price stability. Meanwhile, St. Louis Fed President James Bullard warned that inflation will rise above the Fed’s target late next year. However, most FOMC participants reiterated their view last month that the Fed will refrain from raising its benchmark rate until 2015.

Fed policy makers are approaching their targets for full employment and price stability faster than they had expected, sharpening the debate over the timing of a rate increase. Unemployment rate declined to 6.1% in June, the lowest level in almost six years, while consumer price inflation rose 1.8% in May, posting the biggest 12-month advance since October 2012. Nevertheless, the inflation rate still remains slightly below the Fed target of 2%.

GBP

"The data leave us scratching our heads, as surveys and anecdotal evidence from the sector point to booming business conditions. There's a strong likelihood that either these latest number will get revised higher or that June will see a strong rebound"

- Chris Williamson, chief economist at Markit

U.K.’s construction sector experience the sharpest slowdown for more than a year as housebuilding activity stalled in May, suggesting the U.K.’s economy may have lost some steam in the second quarter. Construction output declined as much as 1.1% in May compared to the month earlier, when it climbed 1.2%, the Office for National Statistics said. Analysts, however, had expected a rise of 0.9%. From the previous year construction advanced 3.5%, the weakest level since November 2013. New work and repair and maintenance both slid 1.1 percent in May from April, which contributed to the negative data. The construction sector accounts for 6.3% of the economy.

The data follows the report earlier this week, which showed industrial production fell 0.7% in May. While the two indicators suggest a slowing activity in the sectors, other data have remained strong. Jobless rate declined to the lowest level in more than five years in April and the National Institute of Economic and Social Research projects gross domestic product grew 0.9% in the second quarter, the fastest since 2010. In order to boost construction and contain surging house prices, U.K. Chancellor George Osborne articulated in June 'revolutionary reforms' to urban planning in order to increase the amount of new housing to cool down increasing house prices.

CAD

“The Canadian job market remains mired deep in a mid-cycle funk, with precious little employment growth over the past year”

- Doug Porter, chief economist at BMO Capital Markets

Statistics Canada said the Canadian economy unexpectedly lost 9,400 jobs in June and unemployment rate rose to the highest level since December 2013, as an increase of hiring in the construction sector was offset by the biggest drop in part-time jobs in nearly two years. In contrast, economists had expected employment to rise 20,000, while unemployment rate was seen to remain unchanged from the previous month at 7.0%. On an annual basis, employment rose by 72,000, the lowest level in over four years. The part-time sector lost 43,000 jobs, slightly balanced out by 33,500 new full-time positions. By industry, one of the biggest drops in employment was within the business, building and other support services, with 27,000 positions cut in June. Another 15,000 jobs were lost within the agriculture sector. Nevertheless, as summer began, construction sector created 32,000 new jobs, the highest in over two years. Also, 21,000 jobs were added in other services sector, including civic and social organizations as well as household services. Canadian experts expected to see a positive gains in employment in June, driven by Ontario’s election and the manufacturing sector.

On the back of the negative data, the Canadian Dollar declined to the two-week low, with the Lonnie losing 0.54% to C$1.0705.

NZD

"There are signs underlying inflation pressures will continue to lift over the coming year"

- ASB economists

While New Zealand business morale declined from the highest level in 20 years in the second quarter, according to the Quarterly Survey of Business Opinion, majority of economists focussed on a fact that the survey showed inflation is accelerating. The consumer price index might have risen 0.4% in the second quarter for an annual rate of 1.8%, according to a Reuters survey. The government figures due for release on July 16 would post the fastest inflation since the third quarter of 2011, when prices reflected the 2010 hike in good and services tax to 15%. Market expectation for CPI is just slightly ahead of the Reserve Bank on 0.3% for the quarter and 1.7% annual. If expectations are met, the RBNZ will have no reason not to increase the official cash rate to 3.5% on July 24, the highest level since December 2008. The central bank tries to keep inflation near the mid-point of its 1%-3% target band.

Separately, New Zealand’s house sales declined in June from the previous year, adding to signs the central bank’s restrictions of low-equity loans are curtailing demand at the cheaper end of the market. Sales plummeted 6.1% in June from 2013 and were down 12.3 compared to May’s figure, according to the Real Estate Institute. The median prise rose $33,250 or 8.4% in the year to $427.250, and declined 0.6% from may.