Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“After the bold package announced in June, the ECB is now in a wait-and-see mode”

- Marco Valli of UniCredit Economics

European producer prices, considered to be a proxy for the closely followed consumer price inflation, declined once again on a yearly basis in June, recording the 12th consecutive month without growth, according to Eurostat data. The Producer Price Index fell 0.8% on year in June, following May’s decline of 1.0%. On a monthly basis, however, the reading beat estimates and climbed for the first time this year, inching higher seasonally adjusted 0.1% in June, compared to expectations for a flat reading.

The index underscores consistently weak pressures on consumer prices, with economists being concerned that the trend may become increasingly protracted, which may lead to stagflation, meaning ultra low inflation combined with zero economic growth or an open deflation. In June, the European Central Bank trimmed the interest rate on the main refinancing operations by 10 basis points to 0.15%, the interest rate on the marginal lending facility by 35 basis points to 0.40%, as well as cut the deposit rate into negative territory for the first time ever, to -0.10%. The next central bank meeting is scheduled for August 7, with analysts betting on uneventful outcome, as Mario Draghi and his colleagues will prefer waiting until recently launched measures spill over to the real economy.

USD

“When there is that kind of gap, it gets your attention”

- Jeffrey Lacker, President of the Federal Reserve Bank of Richmond

Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, is concerned over the gulf of expectations between financial markets and the U.S. central bank over when interest rates might be raised and the pace of rate hikes over the next two years. Short-term interest rate markets have been pricing in for months a slower pace of interest rate increases compared to policymakers’ forecasts. Lacker thinks that investors may be misled by the Fed's policy statement, which says that, even after the first rate hike, the Fed may keep rates lower than normal in the long run. This gap of expectations might be risky as misalignment may cause volatility in case traders have to adjust rapidly.

With the U.S economy growing 2.4% in the second quarter compared to the same period last year, central bankers continued to trim asset-purchase programme last month and said disinflation risks had subsided. Policy makers in June forecast announced they would lift the Fed funds rate above zero sometime next year, without specifying a month. However, Fed Chairwoman Janet Yellen reminded investors in her July testimony to Congress that if labour market improves more swiftly than the rate-setting committee expects, hikes in the federal funds rate would probably occur “sooner and be more rapid than currently envisioned.”

GBP

“Overall the survey adds to the view that construction companies have performed impressively so far this summer, which raises the likelihood that the sands of time could wash away the construction weakness seen in the preliminary second quarter GDP release"

- Tim Moore, senior economist at Markit

Britain construction sector activity remained firmly in the expansion territory, coming in at 62.4 in July year-on-year, fuelling optimism over the nation’s economic prospects. Although the data showed that the U.K. construction activity, which accounts for 6.3% of total gross domestic product, declined compared to the June’s reading of 62.6, it overshot economists’ expectations for a 62.1 reading. Housing activity remained by far the best performing construction category, with the U.K. homebuilding rising to the highest level since November 2003. Meanwhile, sharp increases in overall construction activity led to a new survey-record pace of job creation and a further rapid lengthening of suppliers’ delivery times in July. Before the data, GBP/USD remained quiet to trade at 1.6820. After the release of the data, the Pound strengthened versus the U.S. Dollar, with GBP/USD easing up 0.04% to trade as high as 1.6829, compared to 1.6820 ahead of the data. This reaction is considered to be relatively muted.

Overall, Markit's PMIs in all three sectors (namely, construction, manufacturing and services) have been slowing down since the end of 2013, although the pace of total growth kept its momentum at 0.8% in the second quarter. Economists predict growth to roll on at a similar pace into the third quarter, but should then decline towards the end of the year.

CNY

“The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities as property related activity, such as agencies and residential services, see less business”

- Hongbin Qu, chief Asian economist

China’s service sector activity fell to the lowest level ever in July, underscoring threats of a slowdown in the property sector if policymakers fail to take steps. The services PMI slumped to 50.0, the threshold between expansion and contraction, down from 53.1 in June, posting the weakest reading since records began in November 2005, according to HSBC Holdings Plc and Markit Economics. Nevertheless, HSBS is said to expect that the services sector could benefit from the recovery in investment in the coming months. China’s official non-manufacturing PMI index also declined to 54.2, hitting six-month low. Following the data release the Australian and New Zealand Dollars slid versus their major peers, with the Aussie losing as much as 0.9315 against the Greenback from a six-day high, while the Kiwi dropped to 0.8509.

The Chinese officials have attempted to support growth in targeted parts of the nation’s economy over the last year through 'mini stimulus' measures including loosening up lending criteria for banks that are willing to provide loans to small businesses. A slowdown in the property market poses large systemic risks to the economy as the market is estimated to make up some 20% of total GDP. The market is faced with major overcapacity as property developers have been slow to react to declining demand.

AUD

“The most prudent course is likely to be a period of stability in interest rates”

- Glenn Stevens, RBA Governor

No surprises provided by Australia’s central bank this morning, as the Reserve Bank of Australia decided to stay pat on interest rates, keeping its benchmark cash rate at record low, and reiterated it expects a period of steady borrowing costs amid underperforming economy, as the central bank tries to rebalance the economy as Australia’s mining investment boom fades. The cash rate, rate of interest which the central bank charges on overnight loans to commercial banks, has now been at historic low of 2.5% for twelve months. The Australian Dollar was little changed following the widely anticipated uneventful outcome, trading at 93.33 U.S. cents. The Aussie lost 1.5% in July, halting a five-month 7.7% rally, and is expected to fall another 87 cents by the second quarter next year. Nevertheless, central banks still believes that the nation’s Dollar is at uncomfortably high level, which is impeding a transition in economic growth.

Meanwhile, Australia’s trade gap unexpectedly narrowed in June as imports declined while exports remained unchanged. The trade deficit shrank to A$1.68 billion in June from a revised $2.04 billion deficit a month earlier, the Australian Bureau of Statistics, coming in smaller than economists expectations of a $2.0 billion shortfall. Australian exports grew by just $125 million in June to $26.6 billion, while imports declined 1% to $28.3 billion.