Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“This is a very disappointing figure after the already strong contraction in May (caused by additional holidays in some countries)"

- Peter Vanden Houte, ING Bank

Industrial production in the Eurozone declined for a second consecutive month in June, a further sign that 18-country bloc’s economic recovery weakened in the second quarter. In its report, Eurostat said that output in factories, mines and utilities dropped 0.3% from a month earlier, when the 1.1% drop was registered, and remained unchanged compared to the same period last year. Analysts, however, expected a 0.5% rebound. The Euro was impacted by the data release, as the currency lost as much as 0.16% versus the Greenback to trade at 1.3348. The ECB announced last week that it is ready to launch quantitative easing in the Euro zone should the outlook for the currency bloc deteriorate further. Eurostat will release its data of economic growth during the second quarter today. It is projected that the Euro bloc faced a second consecutive three-month period of slowing growth, with GDP having increased 0.1% in the Q1. Faltering demand and high unemployment rate across the European economy is reflected in low inflationary pressure, which threatens to drag the bloc into a deflationary spiral. Both periphery countries Spain and Portugal reported falling consumer prices earlier this week, with cost of living declining 0.3% and 0.7% on the year in July, respectively. Meanwhile, data from Europe’s growth engine, Germany continue adding to fears as the nation’s economy slowed in the Q2 amid uncertainty caused by geopolitical crises in Ukraine and the Middle East, while inflation fell 0.8% in July, the lowest since February 2010.

USD

“We’re seeing decent but not great consumer spending”

- Christopher Low, chief economist at FTN Financia

Retail sales in the world biggest economy unexpectedly remained unchanged in July, indicating a slight loss of steam in the economy early in the third quarter. According to the Commerce Department, spending declined at auto dealers and department stores, but were offset by gains in grocery stores, gasoline stations, restaurants. Core retail sales, which exclude automobiles, gasoline, building materials and food services, inched higher 0.1% in July. The data suggest Americans are still reluctant to spend, limiting growth for the economy. Following the data release, the Greenback turned lower versus the 18-nation currency, with EUR/USD gaining 0.07% to trade at 1.3379, compared to 1.3364 ahead of the data.

Separately, another report showed U.S business inventories increased in June, while a modest rise in non-automobile retailers stocks indicates that the growth outlook for the second quarter might be revised a bit lower. The Commerce Department said inventories, which are a key component of GDP changes, rose 0.4% following the 0.5% gain in May, while on an annual basis business inventories were up by 5.8%. Stockpiles are one of the most volatile parts of the GDP, and thus can have a marked impact on the overall pace of growth. A rebound in stockpile accumulation was the main driver of the second-quarter growth of GDP. Inventories made up 166 basis points of the 4% growth rate.

UK

“The Committee will be placing particular importance on the prospective paths for wages and unit labour costs”

- Mark Carney, BoE Governor

Britain’s unemployment rate continues to fall, while the number of people seeking for unemployment allowances is set to decline below a million for the first time in six years. The Office for National Statistics reported the unemployment rate dipped to 6.4% in the second quarter, the lowest level since December 2008, down from 6.5% in May. U.K. employment rose in the three months to June to more than 30 million, up 1.5% from the same period last year, with total employment rate standing at 73%. However, average wages excluding bonuses increased 0.6% in the three months to June, the slowest pace since records began in 2001, while the average earnings index, including bonuses, declined 0.2%, marking the first drop since 2009. The Bank of England cut its outlook for average wage growth, as it now expects average salaries to inch 1.25% this year, underscoring wage growth has become its key indicator for determining when interest rates are likely to increase. Nevertheless, the central bank hinted that it stays on course to hike interest rates early next year, given wage growth in the country increases. Inflation is expected to hover around the 2% level over the coming two to three years as long as interest rates increase in line with the expectations in financial markets. The estimate for the amount of slack in the economy has been cut from 1-1.5% to 1%. The Pound weakened almost 0.5% versus the U.S. Dollar following the release of the Inflation Report.

JPY

“The probability is high that the July-September quarter will see a rebound”

- Takeshi Minami, chief economist at Norinchukin Research Institute Co.

The Japanese Yen showed a muted reaction to the widely anticipated contraction in Japan’s economy during the second quarter, holding steady against the U.S Dollar. Japan shrank an annualised 6.8% from the prior quarter, the most since 2011, when the record earthquake hit the country, as the sales tax hike in April forced households to put off big-ticket items purchases. Economists, however, had predicted a sharper contraction of 7.1%, but said that a bigger than expected decline in private consumption and a dramatic increase in inventories fuelled concerns over the resilience of the Japanese economic recovery. On a quarterly basis, Japan’s GDP fell as much as 1.7%, the Office Cabinet reported. The contraction followed a jump in growth in the three months through March, when consumers and companies rushed to make purchases before the tax was lifted. The government stands ready to take flexible actions in case of necessity, Economy Minister Akira Amari said, as Shinzo Abe weighs whether Japan can weather another lift in the sales tax to 10% in October 2015. However, he also added that the data has not impacted the government’s confidence that the economy continues to improve gradually. Bank of Japan Governor Haruhiko Kuroda had also sounded upbeat about the economic outlook last week after the BoJ stayed pat on its monetary policy, underscoring the central bank's conviction that no fresh near-term stimulus is needed to shake off the effects of the sales tax increase.

NZD

“Overall spending continues to rise, supported by population growth, an improving labour market and strong consumer confidence"

- Nathan Penny, rural economist at ASB Bank

New Zealand retail spending continued to increase in the second quarter as vehicle sales and values rose at the fastest pace in two years. The Kiwi Dollar strengthened against its U.S. counterpart following the data release, gaining as much as 0.30% to trade at 0.8479. The New Zealand Dollar reached an intraday high of 0.8488 immediately after the retail sales data came in stronger than expected. Statistics New Zealand reported that retail sales volumes surged 1.2% to $18.49 billion in the June quarter from the upwardly revised 0.8% in the first three-month period. Core retail sales, which strip out motor vehicle and fuel sales, also advanced 1.2%, while analysts had expected a 1.1% rise. Just four of the 15 retail industries monitored by Statistics New Zealand did not report a rise in sales over the quarter, with apparel the next biggest negative contributor after fuel retailing. The fresh figures are an upbeat news for the Kiwi after recent negative data, including falling dairy prices and moderating house prices

The key driver behind increase in retail sales is upbeat consumer confidence in the growing economy. The Reserve Bank of New Zealand last month said the economy is expected to expand at an annual average rate of 3.7% this year, from a 2.9% pace in 2013. New Zealand interest rates are seen to resume their upward path next year following a period of stability after the central bank last lifted the cash rate to 3.5% month .