Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Business activity picked up again in July to suggest that the economy is growing at one of the strongest rates we have seen in the past three years”

- Chris Williamson, chief economist at Markit

Both services and manufacturing sectors in the 18-nation bloc in July expanded, meaning confidence strengthened significantly. The main reason for a more solid performance is the ECB’s action launched on June 5. The central bank entered uncharted territory and trimmed all three interest rates and expanded its loan programmes. While some analysts were questioning the efficiency of these measures, and the single currency was still appreciating, companies were already showing stronger confidence about economic future. In contrast, consumer confidence remained unchanged.

The shared currency rebounded from its eight-month low on Thursday, with EUR/USD jumping 0.15% to 1.3481. A composite PMI, which tracks activity in both manufacturing and services sectors, increased to 54 this month from 52.8 a month earlier, hitting a three-year high last seen in April. That was the 13th straight month the gauge remained above the 50 mark, which separates growth from contraction. Analysts, however, expected it to remain unchanged at 52.8. Activity in German manufacturing and services sectors picked up, Spanish unemployment surprised markets to the upside, while French services sector improved as well. Now it is a question whether GDP will receive a boost from this data, as currently the economy is expected to expand at a modest pace of approximately 0.4% per quarter.

USD

“Companies have “been running with very tight labor force levels and now as demand starts to pick up, businesses are finding themselves in some cases very labor constrained”

- Russell Price, a senior economist at Ameriprise Financial Inc.

During the last testimony Janet Yellen pointed out that the world’s largest economy still requires a support from its central bank. The recovery is on the way, with labour market showing signs of recovery as well. Earlier this month a report showed jobless rate fell to 6.1% in June, while the economy added 288,000 jobs over the period. The only indicators that are still lagging behind are the participation rate and wage growth.

Over the last several months weekly unemployment claims stabilized around 300,000, while last week the indicator fell to its lowest level since February 2006. Weekly report from the Labor Department showed initial claims for jobless aid sank by another 19,000 to a seasonally adjusted 284,000 in the week ended July 19. The reading came above market’s expectations for a 305,000 figure, while previous week’s level was revised up slightly. The less-volatile four-week moving average remained still above 300,000-mark, however, also posting to a 7,250 drop over the period. The labour market is on the mend, however, the economy has not matched those gains so far, contracting 2.9% in the first quarter. Experts are betting on a 3% expansion for the second quarter, meaning the economy almost remained flat for the first half of 2014. The next GDP report will be unveiled by the Bureau of Economic Analysis on July 30.

GBP

“Given the sentiment towards GBP has softened recently, the absence of an upside surprise today will likely see GBP continue trade with a heavy tone, but we suspect downside will be limited ahead of tomorrow's first estimate of Q2 GDP”

- Lloyds Bank

Investors still bet on a rally on the Cable by the end of this week, as Friday’s GDP report is likely to add more pressure on the Bank of England to start raising rates sooner-than-excepted.

Nevertheless, so far this week news from the U.K. has been rather disappointing. Following weaker-than-expected public sector net borrowing, retail sales– the leading indicator of economic health, fell short of analysts’ expectations. On Thursday the ONS said sales volumes including auto fuel climbed just 0.1% from May. Experts were betting on a 0.3% gain. Core retail sales fell to –0.1%, also against prediction of a 0.3% increase. The main downside pressure came from clothing sales which slipped 2%, as prices increased the most for any June on record. Despite weaker-than-expected monthly and yearly readings, quarterly growth remain solid, expanding 1.6% from 0.5% three months earlier, posting the strongest growth in the last ten years. Quarterly data is unlikely to be significantly revised down in the next two months, hence, a solid boost to GDP can be expected. Retail sector accounts for around 5.7% of total economic output.

Soon after the release of the data the Pound turned lower 0.16% to 1.7012 versus the Greenback. While market sentiment is strongly bearish (66%), vast majority of pending orders in a 50 and 100-pip range are placed to buy the Sterling versus the Buck.

JPY

“Export recovery will be sluggish mainly due to structural reasons. The trade deficit will remain at the current level through the end of this year with both exports and imports growing slightly.”

- Kiichi Murashima, chief economist at Citigroup Inc.

The Japanese Yen was still trading around 101.48 against the Greenback on Thursday, neglecting trade figures from the world’s third largest economy. There is a strong support located at a recent low around 101.42, represented by a lower boundary of the channel up pattern. The pair is unlikely to penetrate this level any time soon, as 70% of traders are holding long positions, expecting the Buck to continue appreciating against the Yen.

A report from Ministry of Finance was the first part of this week’s data, with the inflation report on the radar. The nation’s trade gap shrank to 822.2 billion yen in June from 909 billion a month earlier. Analysts expected a shortfall of 665 billion over the observed period. At the same time, exports fell 2%, while imports climbed 8.4% both on a yearly basis. Figures may not be encouraging, however, they neither can be considered as a cause for concern. Exports remain lacklustre, even despite stronger growth in the U.S., pointing at a lack of competitiveness. At the same time, imports of electrical machinery are still rising, suggesting the trade balance will stay in the red. According to some economists, falling global energy prices and a restart of the nation’s nuclear reactors will reduce the import bill in the foreseeable future. The only worrying sign is that persistent deficit makes Japan dependent on its foreign creditors– a serious risk especially keeping in mind Japan’s enormous public debt.

NZD

“It is prudent that there now be a period of assessment before interest rates adjust further toward a more-neutral level”

- Graeme Wheeler, Reserve Bank of New Zealand Governor

With a surprise for some analysts the RBNZ raised the official cash rate further, however, signalled a pause in interest rate hikes in order to assess the impact of monetary policy to date. As a result the Kiwi plunged most in nine months, with the corresponding index falling 0.9% against 16 major currencies. The most traded Kiwi cross, the NZD/USD currency pair, sank 1.38% to 0.8577 immediately after the report and extended its decline further during the day.

The Reserve Bank of New Zealand made its fourth consecutive rate hike, bringing the OCR to 3.50%, citing strong inflationary pressure as the main reason. Despite further tightening, the central bank claimed that it will take a pause in the process of normalization of interest rates, making it clear they are uncomfortable with the high level of the exchange rate. Currently, markets believe that Graeme Wheeler and his team will wait until 2015 before making another rate hike in the face of falling commodity prices, tame inflation and emerging signs that housing market is cooling. Referring to the 75-basis-point increase that took place already this year, the Governor pointed out the economy is adjusting to the monetary policy tightening, meaning there will be a period of assessment before further tightening. It seems that after a prolonged rally in the first half of the year, both South Pacific currencies will stabilise around the current level and will be trading in a narrow range.