Daily Forex Fundamental Overview

Fundamental Analysis

Last week’s overview, this week’s key events

The previous week brought plethora of interesting news from the world leading economies. The North America surprised markets to the upside with the latest GDP numbers, as the U.S. economy expanded a phenomenal 4.0% in the second quarter following a –2.9% contraction in the first three months of the year, while Canada saw its growth increasing at the 0.4% pace, more than initially expected. Unfortunately, the positive data out of the world’s number one economy was offset by a softer employment figures, with the jobless rate inching up to 6.2%. Nevertheless, the Federal Reserve remains on course of tapering, as it announced it would wind down its purchases of mortgage and Treasury bonds to $25 billion a month.

Meanwhile, on another side of the Atlantic, European jobless rate fell to 11.5% in June, hitting the lowest since September 2012 and from 11.6% a month earlier. While this data brought some optimism to the economic prospects of the single currency region, inflation data continues to disappoint and to spike fears into economists. 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. 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. All in all, the EUR/USD was trading in a tight range during the previous week, hovering around the 1.34 mark.

As to the U.K., the country that has been showing the most brilliant economic performance among developed nations, a set of measures aimed at cooling demand and prices in the housing market is finally working. Thus, this year the Bank of England faces less pressure concerning the housing market as in 2013. However, the International Monetary Fund added a fly in the ointment, which believes that U.K. currency is overvalued by 5-10%.

This week all eyes will turn to the South Pacific countries, as the RBA will release its Rate and Monetary Policy Statements, while New Zealand will either confirm or deny the expected fall in unemployment. The ECB and BoJ will conduct press conferences, where central bankers may shed some light on future monetary policy actions.

EUR

“Firms displayed a measure of confidence regarding the near-term outlook as they took on extra staff and increased stocks of purchases, ending a sequence of decline which lasted almost seven years"

- Andrew Harker, an economist at Markit

Activity in the Spanish manufacturing sector rose at a slower pace in July, even despite the fact that companies continued to take on new employees in a sign that the economic recovery is set to gain steam. In its report, Markit said that Manufacturing PMI declined to 53.9 compared with 54.6 in the previous month, still signalling an eighth consecutive month of expansion. The survey shows that growth is likely to continue, with new orders rising although at a slower pace than in June. However, the pace of new hiring was moderate, and it will likely take years to bring the jobless rate down from the record high levels it reached in the wake of a boom and collapse in Spain's construction sector. Spain's economy grew at its fastest quarterly pace in six years during the second quarter, with gross domestic product increasing by 0.6% from the three months to March. The recovery of the Spanish economy, the Euro zone's fourth largest, has been one of the most positive developments for the currency area over the past nine months.

In the meantime, Italy’s manufacturing PMI fell to 51.9, the lowest level since November, down from 52.6 in the previous month. While the figures signalled a 13th month of expansion, it was below the median forecast of 52.5. For the Euro region as a whole, the Markit Economics gauge was at 51.8, compared with a prior estimate of 51.9.

USD

“The labor force rose, and the labor force rises typically when people are feeling better about the backdrop”

- Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC

While American employers added more than 200,000 new jobs for a sixth consecutive month in July, the longest period since 1997, the unemployment rate rose to 6.2% as more people joined the labour force. Nevertheless, an unexpected rise in the jobless rate may also point to some slack in the labour force, which could give the Fed room to keep interest rates low for some time. Nonfarm payrolls rose 209,000 last month after jumping by 298,000 in June, according to the Labor Department data. July marked the sixth straight month that employment has rose by more than 200,000 jobs, a streak last seen in 1997. The pace of hiring this year may help boost a self-reinforcing cycle of gains in spending and job opportunities that will spur the economy. Employment at private service providers rose 140,000 in July, the smallest gain in six months. Meanwhile construction companies added 22,000 workers and factory employment increased 28,000 last month, driven by a 14,600 gain in payrolls at auto plants, which was the biggest since April 2013.

While the labour market has improved, Fed policy makers said they will keep interest rates low until wages accelerate and more discouraged workers find jobs. Average hourly earnings, which are being closely watched as a potential signal of reduced slack that could urge the Fed to raise rates, rose only one cent. That left the annual rate of increase at 2.0%, still well below the levels that would make Fed officials concerned.

GBP

“It remains too early to gauge the impact of the Ukraine crisis, but the worry is that the combined effects of expected policy tightening, heightened economic uncertainty and sluggish trade could mean manufacturing growth could suddenly weaken more than expected"

- Rob Dobson, senior economist at Markit

Britain’s manufacturing sector expanded at the slowest pace in a year in July amid fears that geopolitical tensions between Russia and the West may start to have an adverse impact on manufacturing exports. Slowing increase of manufacturing output, orders and job creation caused the Markit/CIPS PMI headline index to fall towards 55.4 down from 57.2 a month earlier, hitting the lowest point since July 2013 and against economists’ expectations for 57.2. Growth, however, remained buoyant by historical standards driven by elevated business confidence, as well as slightly easier credit conditions, and the slowdown was in line with the Bank of England's view that U.K.’s economic performance will weaken in coming months. Markit said growth in new export orders slowed to a four-month low and backlogs of work declined at the fastest pace since May 2013 with some companies saying they had excess capacity. Moreover, employment in manufacturing rose in July at its slowest pace since October last year.

The Sterling fell to the lowest level in seven weeks against the Greenback after the data release, which some investors saw as weighing against an early interest rate hike by the nation’s central bank. The International Monetary Fund said earlier this week that the Pound was overvalued by as much as 5-10%.

JPY

“The BOJ is not aiming at achieving the price stability target of 2 percent temporarily. What it aims at is to achieve an economy in which inflation is about 2 percent on average year after year"

- Haruhiko Kuroda, BoJ Governor

The Bank of Japan Governor Haruhiko Kuroda still remains optimistic about the country’s economic prospects and inflation, highlighting a divergence in the BoJ policymakers’ views, as his colleagues expressed concerns about consumption and exports earlier the previous week. While Kuroda acknowledged that a decline in demand has been observed in durable goods such as cars following the sales tax hike in April, he said the higher rate's adverse impacts are likely to diminish over the summer, bolstered by solid income and job conditions.

Kuroda also reiterated his pledge to expand stimulus without hesitation if inflation faltered on the path to his 2% target rate and if risk factors undermine the outlook for growth. In addition to that, he highlighted that the central bank will closely monitor how a decrease in real income affects consumer spending. Kuroda said an advance in summer bonus payments to workers would help consumer spending recover from a lift of the sales tax in April, while labour and supply constraints meant companies were expected to keep raising wages. The BoJ Governor was also optimistic on the outlook for exports, which have remained sluggish even despite weaker Yen, saying that this was due largely to cyclical factors such as a lack of activity in emerging Asian markets.

AUD

“Despite a marked improvement in jobs growth since the start of the year and ongoing low interest rates, confidence in the labor market remains weak and fragile"

- Bill Evans, Westpac chief economist

Retail sales in the South Pacific country jumped more than initially expected in June following a sharp fall un sales in the previous month, in a sign that consumers have recovered somewhat from a budget-related slump in confidence and stimulus efforts, designed to offset a sharp decline in the mining sector, are encouraging consumers to start spending. The Bureau of Statistics said that retail sales rose as much as 0.6% in June, coming in stronger than the projected 0.3% increase in sales. The jump in monthly sales was driven by a 1.5% increase in food retailing, dining out services and a rise in household goods sales. This, however, was partly offset by decreases in clothing retailing and department-store sales.

In the meantime, Australian job ads were slightly higher in July than in the previous month, adding to signs of a stable labour market ahead of this week’s official employment data. Job adverts climbed for a second consecutive month in July, albeit at a mild pace, raising hopes that the job market could be starting to stabilize after a series of weak labour figures in recent months. According to the ANZ, advertised job opportunities ticked 0.3% higher, following a revised 4.4% advance in June and a 5.7% slump in May. Following the data release, the Australian Dollar rose against the Greenback, gaining 0.16% to trade at $0.9322 from $0.9306.