Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“What is happening in geopolitics is tilting the balance toward having to implement further stimulus"

- Andrew Bosomworth, a senior portfolio manager at Pimco

Italian Finance Minister Pier Carlo Padoan said he is convinced that the European Central Bank will take steps to boost growth and stem the threat of deflation in the Euro zone. His comments came just days after new data showed growth in the 18-member area stagnated in the second quarter, as the German economy contracted and growth remained flat in France, while Italy has also slipped back into recession. Meanwhile, French Finance Minister Michel Sapin urged the European Central Bank to act to bring the single currency down to a level he described as more "normal." Sapin has also prompted the ECB in recent days to stimulate the Euro zone economy following recent disappointing growth figures. After the ECB cut interest rates in June and promised banks cheap long-term loans starting in September, the central bank has run out off its monetary policy instruments and all that is left is printing money to buy bonds aka quantitative easing. However, there are some practical and political barriers in the ECB's way, as it is boxed in by its own plans, and still faces strong opposition Germany to any such monetary softness.

In the meantime the Euro zone’s current account surplus shrank in June, as the shortfall on current transfers widened notably from May. The current account surplus fell to a seasonally adjusted EUR 13.1 billion in June from EUR 19.8 billion in May.

USD

“The Fed will find these data further supportive of the go-it-slow approach to exiting its accommodative policies"

- Dan Greenhaus, chief strategist at BTIG

The number of building permits issued in the U.S. increased significantly more than expected in July, adding to signs the housing market recovery rebounded after stalling in the second half of 2013. The U.S. Commerce Department said that the number of building permits issued last month advanced by 8.1% to a seasonally adjusted 1.052 million units from June’s figure of 973,000. The report also showed that U.S. housing starts jumped by 15.7% last month to reach a seasonally adjusted 1.093 million units compared to June’s total of 945,000, overshooting expectations for an increase of 8.6% to 969,000 units. The U.S. housing market is regaining its footing after being slammed by last year’s run-up in interest rates. A shortage of properties for sale has also pushed prices higher, discouraging many first-time buyers.

Separately, another report showed that U.S. consumer prices rose in July at the slowest pace in five months, held back by a decline in gasoline prices. Consumer price inflation nudged up by a seasonally adjusted 0.1% following the 0.3% rise in June. On an annual basis, consumer prices increased 2% in July, meeting analysts’ expectations, and down from the June’s figure of 2.1%. Core CPI, which is considered by the Fed as a better gauge of long-term inflationary pressure as it excludes volatile food and energy components, rose at annualized rate of 1.9% in July. The central bank usually tries to aim for 2% core inflation or less.

UK

“As long as inflation remains benign, the central bank will also have leeway to raise interest rates slowly and gradually, when they decide the time has come to do so."

- Jeremy Cook, chief economist at World First

Interest rate increase in the U.K. is put off from the agenda again, as Britain’s consumer prices declined more than expected in July amid lower costs of clothing, footwear, food and non-alcoholic drinks. According to the Office for National Statistics, inflation fell to 1.6% from 1.9% a month earlier, whereas economists had predicted a CPI rate of 1.8%. Deeper discounts on the high street between June and July this year compared with the previous year slashed more than 0.2 percentage points of the headline CPI rate, the ONS said. CPI now appears to move towards May's figure of 1.5%, which at the time was the lowest level in more than four years. Inflation has been below the Bank of England 2% goal for seven consecutive months, marking the first time since 2005. It means the Bank of England remains under little pressure to lift interest rates in order to keep inflation at or below its target rate of 2%. Following the release of the inflation figures, the Pound weakened against both the U.S. Dollar, hitting its lowest level since April, and the shared currency.

Separately, data showed that producer price inflation in the U.K. declined for the second consecutive month in July. PPI input dropped by a seasonally adjusted 1.6% last month, against analysts’ expectations for a 1.1% fall, while PPI input moved lower by 0.9% in June.

AUD

“The Board judged that monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates"

- RBA minutes

RBA minutes showed the economic conditions assessment of main trading partners including China, Japan and the U.S. For all of them it is believed that their current growth level will stay above the average in the long run. China and the U.S. in particular had rebounded from a disappointing first quarter and had shown very favorable data this quarter. Nevertheless, the outlook for Japan was uncertain as the further effects of the tax hike and fiscal stimulus were hard to predict. Regarding the financial markets main topics were the actions of other central banks such the Fed's asset purchase reduction and changes introduced in the ECB. As for the Australian economy itself the focus was on the inflation, employment, exports and the overall GDP growth. The inflation was a bit higher than the members had expected at 3% year-ended. This was mainly due to the depreciation of the exchange rate. In spite of this the RBA was fairly confident that the inflation will stay in the 2-3% range. Even with somewhat improving data coming out of the labour market, the board members were a little sceptical and pointed to the small near-term employment growth prospects and possibly large spare labour capacity. Generally, the economy is expected to have slowed down a bit in the second quarter after the above average growth in the first one. In addition, the GDP is expected to be below trend for 2014 and 2015 accordingly picking up afterwards. Due to all of this the Board kept the cash rate at 2.5%.

NZD

"Monetary conditions are currently perceived as being easy; however, throughout the year firmer conditions are expected as the number of respondents expecting easy monetary conditions progressively reduces across the expectation horizon"

- RBNZ survey

New Zealand’s producer prices fell in the second quarter as diary prices declined, while input prices were also lower amid cheaper electricity costs and dairy manufacturing input costs. As a result the New Zealand Dollar lost versus its American counterpart as the report added to signs that the nation’s economy may have started to slow, providing room for revising interest rate outlook. The output PPI, which measures the prices fetched by producers at the factory gate, declined 0.5% in the June quarter, according to Statistics New Zealand, partly reversing a 0.9% increase in the previous three-month period. Input PPI, which measures the change in costs of components used in the production process, dropped 1.0% in the April-June period, following a 1.0% surge in the first quarter. On top of that, the Kiwi Dollar faced even more downward pressure after the data showed expectations of CPI inflation, GDP growth as well as the New Zealand Dollar exchange rate declining, sending the Kiwi dollar back near its recent two-month low against the U.S. Dollar. CPI is seen rising at an annual 1.96%, down from the 2.08% rate three months ago, while two-year expectations decline to 2.23% from 2.36%. The NZD/USD exchange rate is expected to decline to 0.83 by the end of this year and to 0.80 in the next six months. One-year expectations for GDP growth have dropped from 3.3% to 3.1%, and on the two-year horizon, the annual growth expectations have fallen from 2.9%