Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“The euro zone inflation data is another one worth keeping an eye on, although following the ECBs decision a couple of months ago to announce a big monetary stimulus package, the numbers have lost some importance”

- Craig Erlam, a market analyst at Alpari

On Wednesday statistical offices from Germany and Spain unveiled their inflation data that were not very promising. Stimulus that was announced in June by the ECB was expected to boost growth and inflation in the 18-nation bloc. While this decision helped to lower yields on government bonds, and the single currency depreciated (also with help of the U.S.), the economy is still not showing any signs of improvement.

All hopes were for Thursday’s report from the Eurostat. While labour market improved slightly, with the overall jobless rate falling to 11.5% in June, hitting the lowest since September 2012 and from 11.6% a month earlier, the inflation rate slowed further. The cost of living in the Eurozone climbed just 0.4% in July, following a 0.5% increase in June. This is considerably below the middle-point of the ECB’s 2% inflation, the indicator is still in the “danger zone” and posing a threat of deflation. The so-called core measure remained unchanged at 0.8% over the observed period. Thursday’s data tested Mario Draghi’s patience once again. Earlier, Draghi has admitted that it will take time for his stimulus to spill over to the real economy. Anaemic growth, stubbornly high unemployment and persistently low inflation are all constantly warning about the Japan-style stagflation and only reinforce the view the ECB will have to stick to the U.S-style quantitative easing programme.

USD

“Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources."

- Janet Yellen, Fed chairwoman

Despite the fact that the number of Americans seeking unemployment aid increased last week after plummeting to the lowest level in 14 years earlier in the month, the underlying trend still points to a continuing strengthening of the U.S labour market conditions. Initial jobless claims rose 23,000 to 302,000 in the seven days ended July 26, according to the Labor Department. The previous week's claims were revised to show 5,000 fewer applications received than previously recorded, totalling 279,000. Claims for the week ended July 19 reached the lowest point since May 2000. The big decline in claims earlier in July was probably caused partly by annual summer shutdowns by some major U.S. manufacturers to retool their plants for new production. The four-week moving average of claims, which smoothes out weekly volatility, fell 3,500 to 297,250, the lowest since April 2006. The Fed policymakers on Wednesday acknowledged the improvement in labour market conditions, but said "significant underutilization of labor resources" remained.

The Federal Reserve, which has a mandate to boost employment while keeping inflation under control, is closely watching the labour market data as it scales back its bond-buying programme and starts to debate when to raise interest rates. Following its policy meeting this week, the central bank announced it would wind down its purchases of mortgage and Treasury bonds to $25 billion a month.

GBP

“The slowdown was not entirely unexpected, given mounting evidence of a moderation in activity in recent months. With the labor market strengthening, mortgage rates expected to remain low and consumer confidence rising, activity is likely to recover in the months ahead.”

- Robert Gardner, Nationwide’s chief economist

This year there is no as much pressure on the Bank of England concerning the housing market as it was in 2013. A set of measures aimed at cooling demand and prices in the housing market is finally working. On Thursday the Mortgage Advice Bureau said the average loan to value for buyers using the mortgage guarantee element of government initiative Help to Buy, jumped to a record 94.4% in the second quarter. At the same time, the average deposit of a buyer through its broker stood at 8,527 in June, following 8,722 and 11,438 in May and April, respectively.

Another report from the Nationwide Building Society showed that house prices rose at their slowest pace in more than a year in July. House values increased by as much as 0.1%, while on a yearly basis prices still rocketed 10.6%. It seems that the market is normalising, especially amid higher LTV mortgages. All reports are underscoring signs of a loss of momentum in the housing market, following a boom propelled by record-low interest rates and improving confidence that pushed prices to all-time highs. Nevertheless, it is still unclear whether house prices fall sharply, leaving more people at risk of falling into negative equity, which is equal the size of a mortgage. The latest developments in the housing market are putting a dilemma for officials on how to avoid an emerging bubble and do not harm consumers.

JPY

“Wage increases have yet to spill over to smaller companies. Unless wages rise in real terms, we can’t say deflation has ended.”

- HSBC

It is not a surprise that achieving 2% inflation in next fiscal year is a key priority for the BoJ and Japanese government. 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. Nonetheless, the labour market is sending worrying signs, while the rest of the economy is slowing as well.

Average total wages, overtime and bonuses in the world’s third largest economy climbed 0.4% on a yearly basis in June, the Labour Ministry said on Thursday. It compares with a 0.6% increase in May and a 0.7% gain recorded in the third and fourth months. Despite a persistent slowdown June’s reading rose for the fourth straight annual rise, the longest stretch since total wages rose for six consecutive months in 2010. The report also showed that real wages, which better reflect the situation in the market and matter more to households, plunged 3.8% over the same period, matching May’s reading and marking the sharpest drop since December 2009. Real wages are adjusted for inflation. Shoring up this indicator is vital to sustaining private consumption– the main engine of Japan’s economy. While statistics from Japan was not very convincing, strong GDP and FOMC meeting in the U.S. dragged the USD/JPY pair through the 103-mark.

AUD

“We might be passed the peak. I think the levels will still to rise, but not at the pace that we’ve been seeing.”

- Ben Jarman, JP Morgan economist

Next week the RBA will have its word and even though the central bank will stay pat on the monetary policy, Glenn Stevens can radically change a tone of his speech from neutral to dovish. The central bank pledged to keep interest rates unchanged for a period of time, however, recent data is suggesting the easing cycle might be not over yet and the RBA will have to pull the trigger again.

Australian officials are desperately looking for another sector that will assure economic prosperity in a long-term. Mining sector is losing its steam, and the recent decision by Hastings Deering company to cut around 400 staff is another proof of that. While they have implemented a set of efficiency and productivity measures, none of them helped to offset challenging market conditions.

There were hopes the housing market will provide a significant boost to the economy, however, Australian Bureau of Statistics said the number of buildings approved sank a seasonally adjusted 0.5% to 15,659 over the period. They were also 16.0% higher on year, however weaker than the anticipated 23.3% jump. While general picture still adds to evidence the construction sector is still in a boom phase, some indicators are suggesting the market is starting to moderate.