Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Speculation about an asset-purchase programme from the ECB is likely to gain further traction”

- Benjamin Schroeder, an interest-rates strategist at Commerzbank

There is always a clam before the storm. The most traded currency couple was unshakable on Tuesday, trading in a very narrow range for the second straight session. The pair was kept quiet on Tuesday by a light agenda, however, as it was already mentioned, the pair will be highly volatile in the second half of the week, as markets are waiting for inflation figures from Europe and the second-quarter GDP from the United States.

The stimulus package announced in June by the ECB has already pushed the average yield on bonds from Europe’s most-indebted countries to a record low, while service and manufacturing production was boosted in a vote of confidence. However, stimulus has yet to provide a boost to growth, prices and lending, with geopolitical issues threatening to undermine sluggish recovery. Inflation and unemployment data will be preceded by the region’s business confidence, which is likely to be undermined by tensions in Ukraine and Israel. Currently, the central bank predicts a 1% expansion for this year, 1.7% and 1.8% for 2015 and 2016, respectively. At the same time, inflation is projected to rise gradually over the next two years to 1.4% in 2016, still far away from the official target. The central bank is running out of tools, and in case any of indicators fails to deliver, then Mario Draghi will have a real dilemma.

USD

“It’s a healthy slowdown for the housing market. The sooner we correct to a more sustainable growth rate, the better it is for the price outlook in the medium-term.”

- Aneta Markowska, chief U.S. economist at Societe Generale

The first part of important fundamentals from the world’s largest economy is already out, and as it was expected, it surprised markets to the upside, meaning the economy is recovering from first quarter’s slump. A report from the Conference Board showed a gauge of consumer mood, picked up to 90.9 this month from 85.2 in June, also beating analysts’ forecasts of a 85.5 reading. Consumer spending accounts for around 70% of overall economic activity, hence, stronger sentiment points at faster growth in the coming months. On the back of stronger sentiment, the EUR/USD currency pair moved closer to 1.34-mark, trading just 12 pips above it.

Another important part of the economy– housing market is sending worrying signs, as property values in 20 cities expanded at the slowest pace in more than a year in May, another sign of a lull in the U.S. housing market. According to the S&P/Case-Shiller report a corresponding index, a proxy of selling price of a single-family home in 20 metropolitan areas, increased just 9.3%, posting the smallest annual changes since February 2013. Strict lending requirements and higher mortgage rates are bridling sales, meaning consumers will have to lower their expectations of how much they can get for their homes, damping consumer confidence.

GBP

“Thus, investors may have to wait for the BoE meeting on 7 August and the Inflation Report on 13 August for fresh gauges of the bank's intentions, if any”

- UniCredit analysts

Housing market is one the key drivers behind the U.K.’s rapid expansion, hence, any data from the sector should provide a significant impact on the currency and markets. However, it seems that BoE’s efforts to confuse minds of market participants are feeding through, as each fundamental report is having weaker impact than usually. Immediately after the release of the mortgage approvals from the central bank the Cable remained unchanged trading at 1.6981, staying around Friday’s low of 1.6961. Nevertheless, later on Tuesday the Cable penetrated strong support as investors took the pair down again following Monday’s narrow range.

Britain’s mortgage approvals jumped to 67,196 in June following a revised 62,007 a month earlier. Analysts expected a reading of 63,000. That totalled a 2.1 billion in net mortgages, down from 2.3 billion a month ago. At the same time consumer credit eased to 418 million pounds. Demand for mortgages declined during the early months of 2014 after the implementation of the Mortgage Market Review. The recent data indicates a tentative slowdown in the heating housing market, which was one of the key concerns for policy makers. However, it is a question whether a loss of momentum in the sector is lasting, and whether the data leads to a substantial easing back in house price growth over the next several months.

JPY

“The surge in spending ahead of the tax hike all but closed the negative output gap in the first quarter, but this measure of spare capacity is set to widen again in the second quarter as demand falls back”

- Capital Economics

The Japanese Yen is still one of the main losers over the last year, with Yen index falling 4.78% during the last 250 trading days. Nevertheless, the currency stabilized this year, as positive data diminished hopes for additional stimulus any time soon. But that was before and after the tax hike, when consumers and companies increased their spending in anticipation of higher costs. However, it seems that the boost is losing its steam and this time data reflect the true situation in the world’s third largest economy. On Tuesday the Yen lost 0.13% to trade at 101.98 against the Buck, adding to earlier losses.

Household spending accounts for majority of overall economic activity, hence, a 3.0% annual drop in spending in June is a worrying sign for Japan’s policy makers. This comes following an 8% drop in May and a 4.6% decline in the fourth month. On a monthly basis sales plunged 0.6%. Another disappointing set of data came from the labour market, with jobless rate rising to a six-month high of 3.7% last month. Still, policy makers expect that the tight labour market conditions will help workers bid for higher wages, thereby boosting consumer spending and as a result providing higher inflationary pressure. A report also showed that base wages picked up 0.2% in May, posting the first increase in over two years.

NZD

“The easing in business and consumer confidence more recently point to a moderation in growth next year”

- ASB Chief Economist Nick Tuffley

The Kiwi slid further on Tuesday, extending its losses seen a week earlier, as the currency still remains vulnerable to the central bank’s comments. Last week the currency lost 1.5% against the Buck closing at 0.8555 on Friday. Two days later the pair was already trading just 15 pips above the 0.85-mark. With the FOMC meeting on the radar there could be more potential losses for the Kiwi in case Wednesday’s GDP report provides justification for Fed’s hawkish comments.

While Graeme Wheeler claimed the strength of the Kiwi is not supported by macroeconomic data, the economy is expected to continue building up steam during the rest of the year. However, the latest ASB Quarterly Economic Forecasts showed that the growth will moderate to a more sustainable pace already in 2015. Economic growth is currently running above the trend, supported by a surge in construction activity as well as stronger demand across a broad range of sectors. However, the report also showed signs the economy is adjusting to higher interest rates are already emerging. Both business and consumer confidence posted losses, while falling commodity export prices, especially for dairy, was the main reason for softening the tone of recent economic developments. Nevertheless, the Kiwi remains high by historic standards, as yield demand for the currency remains strong.