Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Despite the euro's break below the 1.3500 level observed last week we haven't, as yet, broken below the lows this year at 1.3477. A move through here could well be the trigger point for a move towards the November 2013 lows at 1.3300.”

- Michael Hewson, chief market analyst at CMC Markets UK

The single European currency advanced 0.15% on Monday and was changing hands around 1.3539 at the time of writing, erasing some of the losses that were logged during the last 20 trading days. Moreover, the most traded currency pair rebounded from a half-year low below 1.35-mark as risk-averse sentiment spreads amid investors. Moreover, the pair is expected to trade slightly higher ahead of the number of important economic indicators that are set to be unveiled later this week. While Eurozone manufacturing and services PMI are likely to remain almost unchanged, statistics from the world’s largest economy will add volatility to financial markets. A pickup in inflation and durable goods orders will provide additional support for the Buck, and in case EUR/USD inches below 1.3477, bears will aim at monthly S2 at 1.3436.

Meanwhile, statistics from the 18-nation bloc continue to disappoint, with German PPI declining for the 11th consecutive month in June. According to the Federal Statistical Office, the headline annual PPI in June fell 0.7%, following a 0.8% drop a month earlier, meeting analysts’ expectations. On a monthly basis, producer prices remained unchanged over the observed period. Another disappointment is a clear sign that the headline inflation indicator in the whole region is unlikely to pick up any time soon.

USD

“Analysts may be underestimating the level of prospective improvement in the second quarter,"

- Carmine Grigoli, chief investment strategist at Mizuho Securities

Everyone starting from the ordinary U.S. consumer and up to the Federal Reserve is hoping the second quarter growth will surprise markets to the upside and will be able to offset first quarter’s nightmare. While economic indicators are mixed, second quarter’s revival will be manifesting itself in the second-quarter earnings, however, the next two weeks can be really stressful.

It seems that corporate earnings reports will have more significant impact on the buck and stocks during next two weeks. The recent profit estimate improved from a July’s forecast of 6.2%, while revenue growth now stands at 3.2%, on track to post the most impressive gains since the third quarter. Nonetheless, it is too easy to overestimate the excitement. As usual, financial companies will be reporting first, and they are not always the best barometer of Main Street activity. Despite this, almost 60% of the S&P 500 companies will release their results during next two weeks, and a series of these reports are considered to be a key for investors who are looking for confirmation first quarter’s contraction was only a matter of weather. The world’s largest economy contracted 2.9% in the January-March period, posting its first weak performance in five years. While the future is unclear, one of the indicators is already pointing at a rebuild- usually pessimistic analysts’ expectations, which vast majority of companies still tend to beat.

GBP

“Output has actually surpassed the peak that we saw back in 2008. In other words, the recession is over. Not only is the recession over but the recovery is technically over and we’re now moving into a period of expansion.”

- Peter Spencer, chief economic adviser to the EY Item Club

After trading in boundaries of the double top pattern for almost a month, the cable penetrated the lower boundary last Friday and is now trading around 1.7078. Despite a temporary weakness the Sterling is projected to strengthen against other major currencies closer to the end of this week, as a report from the ONS is expected to point at further strengthening. A move above recent high of 1.7192 will put monthly R1 at 1.7249 on the map.

The U.K. economic output shrank more than 7% from a high of 392 billion pounds to less than 365 billion in early 2009, and up to now GDP struggled to reach that level again. Friday’s estimates from the ONS are predicted to show an expansion of more than 393 billion in the second quarter of 2014. At the same time, quarterly growth will remain unchanged at 0.8%. Ahead of the high importance report, the EY Item Club claimed that economic output will rise by 3.1% over this year, posting the most impressive growth among other G7 nations. Earlier the economy was blamed for the extremely high level of dependence on the private consumption and savings rate. However, the Club predicts capital spending by businesses will post a 12.5% increase this year, reducing the reliance on consumer spending. It means that future growth will be more balanced and sustainable, as expansion will be supported by an increase in the number of people in the workforce, not just consumers borrowing or a growth in wages.

AUD

“The various 'underlying' measures of inflation probably rose by around 0.7 per cent in the quarter and by 2.8 per cent over the year. There was a seasonal increase in health fund costs in the June quarter, but this may be offset by a fall in the cost of domestic travel and accommodation after the peak summer season.”

- Craig James, Commonwealth Bank's chief economist

Consumer prices account for a majority of overall inflation and represents a high importance for the central bank. This week the Australian Bureau of Statistics will publish inflation for the June quarter, but do not expect the RBA to be moved by this report. Unlike all the other report in the recent months or years, the importance of the upcoming bit of data will be almost unimportant. The inflation rate is likely to benign, meaning policymakers will have plenty of scope to keep the monetary policy at the record-low for as long as it is needed. The central bank is unlikely to be fussed by the headline inflation rate fluctuating around the top end of the target range. According to recent reports, labour costs were almost unchanged over the last year, meaning wage growth is weak, while productivity is on the mend. Inflation is still expected to remain within the target range, while exports will most probably ease back, hence, GDP growth will be below trend over this year and, perhaps, the next one.

Another headache for policymakers and politicians, is the nation’s budget. After cutbacks were announced, consumer and business confidence slumped, compounding weaker performance of the mining sector. There are many factors which are acting as constraints on economic growth, hence, inflation is likely to be the least of the RBA’s problems now.

NZD

“In the lead up to the OCR this week, there is still some reluctance for kiwi to go lower,”

- Raiko Shareef, Bank of New Zealand currency strategist

The NZD/USD currency pair bounced back from monthly PP at 0.8654 and was trading close to weekly pivot around 0.8726 at the beginning of this week. The Kiwi received another bullish signal from a report from the Statistics New Zealand, which showed strong immigration flows for the month of June, bolstering the case the central bank should raise interest rates further this week. Monthly net migration advanced to a new decade-high of 4,270, while annual immigration is moving closer to 38,335 in June. One of the main reasons behind stronger migration was a deteriorating labour market in Australia, and with the situation in the job market expected not to improve decisively before the end of this year, the migration dynamic is likely to remain the same, pushing the inflation rate higher and adding more pressure on the RBNZ. The RBNZ Observer is betting on another rate hike later this week, expecting the official cash to reach 3.50%. However, there are concerns that the Kiwi is moving to its highs for the year, as the possibility the central bank will take a pause in the coming months is increasingly high. Falling commodity prices, especially for dairy and logs, as well as softer inflationary pressure may prompt Graeme Wheeler to take his foot of the brake this month. Additionally, the Kiwi is now significantly stronger than the RBNZ wants, therefore policymakers can cite the strength of domestic currency as the main reason to stay pat. In this case NZD/USD heads towards 0.8654 and 0.8553.