Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“The market is completely ignoring the European news. So when the dollar moves, it’ll move, but anything European-specific is not enough. Euro-dollar is also seemingly ignoring all geopolitical noises, whether it’s Russia and Ukraine or Gaza.”

- Brad Bechtel, the managing director of Faros Trading LLC

Since November 2013, when Mario Draghi slashed the minimum bid rate to 0.25% expectations for a fresh easing have been heating up till June 2014. However, it seems that investors have already lost their faith in the President, while news from the 18-nation bloc is having muted impact on the single currency.

Last week Janet Yellen’s testimony dragged the most traded currency pair below 1.35-mark for the first time since February. Actually, the chairwoman only highlighted the already-known fact– the Fed is planning an interest rate hike. In contrast, Yellen’s peer from Europe is having less impact on markets. Draghi’s decision to enter the uncharted territory by cutting a key interest rate below zero pushed the single currency 0.2% higher. Additionally, the shared currency is losing its link with the bond market, as the correlation between Euro’s performance and the yield spreads of Spain, Italy and Portugal is already moving to zero. Dealers in the EUR/USD currency pair have expressed their concerns that the pair is influenced only by the events from the world’s largest economy, as they have assimilated the latest action from the ECB and stated Draghi has nothing he can offer in the future. Moreover, despite the uncertainty surrounding Fed’s future moves, these rumours are having even stronger impact that international anger over the crisis in Ukraine and the conflict in the Gaza Strip.

USD

“Inflation, at least for the moment, isn’t a problem. We had a little bit of a scare, a minute of worry for a while there, but it’s basically going away.”

- Carmine Grigoli, chief investment strategist at Mizuho Securities

Inflation data from the world’s largest economy was not expected to provide a significant impact on financial markets. Moreover, keeping in mind strong support at 1.35– the reaction should have been barely noticeable. Nevertheless, after a report from the Bureau of Labor Statistics showed inflation rose in line with forecasts, the most traded currency pair was dragged towards 1.3459, even penetrating the weekly S1.

The cost of living in the United States climbed 0.3% last month following May’s 0.4% increase. The main upside pressure came from gasoline prices, which accounted for two-thirds of June’s increase. At the same time, annualized CPI climbed 2.1%- unchanged from the previous month. The so-called core measure, which excludes food and energy price, inched higher just 0.1% slowing from 0.3% in May. Inflationary pressure is creeping up, as the U.S. economy is recovering from the recent slump. This is definitely a welcoming development for the Federal Reserve, as there were concerns about sluggish inflation. Steady gains have led analysts to predict the headline inflation gauge running around the 2% target level, could accelerate further as stronger job growth lifts wages. Despite a slight slowdown, the recent performance only supports the case for the Fed to proceed with the tapering process and consider the timing of the first rate hike.

GBP

“George Osborne will be fervently hoping that the public finances do improve over the coming months as it would not only reflect well on the government’s stewardship of the economy but also facilitate the offering of a few sweeteners to the electorate just before the May 2015 general election.”

- Howard Archer, an economist at IHS Global Insight

It seems that not everything is perfect in the U.K. While Friday’s GDP report is expected to show the economy is now the fastest growing among other G7 countries, the latest budget showed a bigger deficit in June. A report from the ONS showed that public sector finances, stripping out financial sector interventions, registered a gap of 11.368 billion pounds last month, compared with 7.594 billion a month earlier and well above analysts’ expectations of a deficit of 10.65 billion. The government aims at a 5.5% deficit of the GDP for the 2014/15 fiscal year, down from 6.5% a year ago. Figures mean that Britain’s public finances continue a weak start to the tax year, leaving George Osborne with a lot of catching up to do to meet his fiscal goals.

Another worrying sign for the economy came from the Confederation of British Industries. Recovery in major sectors, including manufacturing, construction and services can cool in the coming months. The balance of total orders in the nation’s manufacturing sector advanced only 2% on a monthly basis in July, following a 11% increase a month ago and well below the central market forecast of 8%. Even though the indicator is highly volatile, weak official monthly data came in as a surprise, taking into account other reports. On Tuesday the cable was trading close to a recent low around 1.7058, however, by the end of the week the pair is expected to recover.

JPY

“There may be some members who don’t get it, so we have to make sure the BOJ law is revised. The BOJ has to be held accountable.”

- Kozo Yamamoto, Liberal Democratic Party lawmaker

According to the latest minutes from the Bank of Japan, policymakers are determined to keep the current pace of the monetary policy for the foreseeable future, meaning the stimulus programme that was launched in April 2013 is far from its conclusion. It is not a surprise for anyone that central bank’s governor, Haruhiko Kuroda, is extremely confident about the economic future and economy’s ability to meet its inflation target within the planned period. However, he still has to persuade other BoJ board members that they have the power to meet its obligations.

People familiar with the central bank’s thinking stressed out that a majority of the nine members do not share Kuroda’s confidence about flooding the economy with enormous amount of cash will be sufficient to get stable 2% growth in consumer prices. Some of the members are convinced that that cannot be done without government steps to increase the country’s growth potential, which is currently limited around 1% per year. Some even say that the ideological gap is masked in public remarks by board members and that is why lawmakers are still calling for legislation that will force the Bank of Japan to be responsible for delivering on its target. This week’s inflation data can only heat up these speculations, especially if a report fails to deliver.

AUD

“I think low interest rates are doing the sorts of things they normally do in most respects,”

- Glenn Stevens, Reserve Bank of Australia Governor

Speculations about any adjustment of the monetary policy by the Reserve Bank of Australia any time soon have already been extremely low. After reiterating the pledge to keep interest rates at a record-low level during the last policy meeting and keeping in mind planned spending cuts and the fact the economy is still transitioning from mining-investment led growth, pushed bets even lower. Stevens claimed that after a “global panic” in 2008, the world economy avoided a repeat of the depression seen in 1930s and a set of quick actions by central banks supported the economy. However, the recent rise in government debt is a difficulty. Moreover, fiscal policy had smaller impact on the economy than it was additionally thought. Stevens also claimed that in case companied and households do not wish to take on new business risks, central banks cannot push them.

These comments looks really disappointing, however, the Governor also pointed out that there is a “huge potential” for both private and public investment in infrastructure. Efforts aimed at completing the main financial regulatory initiatives should, in theory, deliver less uncertainty and a safer system, also not necessarily crimping growth. After the speech the Aussie jumped 0.15% to 0.9386 against the greenback and hit an intra-day high of 0.9393.