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

German producer prices declined more than expected in July as energy prices continued to push the index down, indicating further downside risks to the cost of living outlook. The PPI index dropped by 0.1% on month and 0.8% on an annual basis in July, against expectations for a flat reading and a 0.7% decrease on monthly and yearly basis, respectively. Energy prices were down by 0.6% from the previous month and 3.2% compared to the last year. Price pressures in the Euro zone remain at dangerously low levels, forcing some experts calling for more actions from the European Central Bank. The most recent inflation data has showed consumer price inflation in the Euro bloc at 0.4% in annual terms, compared with the ECB's target of just below 2%.

Meanwhile, French President Francois Hollande revealed on Wednesday his plans to accelerate reforms to fuel growth, including increased home construction and tax breaks to poorer households in an attempt to win back voter confidence. Housing has become a major issue for the Hollande government, with housing starts in France at a 16-year low hurting the French economy. The proposed measures would tackle taxation as well as regulatory and financing issues for construction. Hollande also urged the European Union and ECB to boost more economic growth through investments and weakening still strong Euro.

USD

“But the consensus view of the Fed is shifting to the center, part of the process of the Fed normalizing its stance, which is fundamentally positive for the dollar”

- Omer Esiner, chief market analyst at the currency brokerage Commonwealth Foreign Exchange Inc

If the economy continues strengthening at a more rapid pace than Fed’s policy makers estimate, interest rates could be lifted sooner than expected. This is the message markets received from the July FOMC meeting minutes. However, for now most Fed officials are not ready to signal an earlier-than-anticipated rate increase even despite the rapidly improving economy and labour market. The Fed moved closer to ending its bond-buying programme, but was blurred about its plans or schedule for raising interest rates. Fed officials are increasingly debating whether the economy's recent progress is sustainable and whether it could support an earlier rate hike. Short-term U.S. rates have been kept near zero since the depths of the financial crisis in December 2008. Most Fed officials believe they can wait until 2015 before hiking rates and have encouraged a perception in financial markets that rate increases will not start until the middle of the year. Now investors’ attention turns to Fed Chairwoman Janet Yellen's speech on Friday at a central-bank symposium in Jackson Hole to get more hint on rate-hike timing.

The U.S. Dollar jumped against the Euro and Yen after minutes showed the central bank was gradually shifting its stance in a more hawkish direction. The U.S. Dollar gained 0.8% versus the Yen to 103.71, the highest level since April 4. The Euro lost 0.4% against the greenback to $1.3264, an 11-month low.

UK

“Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them”

- Martin Weale and Ian McCafferty, MPC members

Monetary Policy Committee's unanimity breaks up, as two Bank of England officials unexpectedly voted to start increasing interest rates in August, marking the first split on rate at MPC since July 2011. Martin Weale and Ian McCafferty were in favour of raising interest rates to 0.75% from 0.5%, whereas the rest of policy makers voted to keep the base rate at a historic low of 0.5%. Nevertheless, the MPC members were unanimous on the asset purchase facility, which currently stands at 375 billion pounds. The hawks suggested that a continuing rapid decline in jobless rate alongside evidence of the labour market tightening indicate that wage growth would pick up. Weak wage growth and its subdued influence on inflation, which currently appears to be a significant weapon at doves’ disposal, may be temporary or may last for much longer than policymakers forecast. If wages increase in the coming months, then the case for an earlier rate hike may gain more ground. If wage growth remains weak for longer than expected, then the case for keeping the bank rate at ultra low even further beyond early next year could undermine BoE’s credibility.

Although Britain's economy is still slightly smaller than before the financial crisis, the BoE forecasts it will grow by 3.5% this year, which would be its fastest rate in a decade.

JPY

“But export growth is unlikely to accelerate much from here. Europe's economy lacks momentum and this will weigh on growth of Japan's big Asian export markets like China"

- Takeshi Minami, chief economist at Norinchukin Research Institute

Japan exports rebounded in July following two consecutive declines in a tentative sign that overseas demand started to strengthen, which could fuel hopes that exports could offset a drop in consumer spending. Overseas shipments surged 3.9% from the previous year to support the Japanese economy, which contracted last quarter the most since the devastating earthquake in 2011. Growth in exports was driven by increased shipments of cars to Europe, metal processing machinery and items such as liquid crystal displays. Exports to Asia climbed 3.4% and were up 2.1% to the U.S. in July, after shipments to both regions declined in May and June. To the E.U., exports soared 10.2% , a 14th consecutive monthly increase. Japan's exports have struggled with weak demand in Asia for much of this year and a growing shift in production overseas, which has disappointed officials in the BOJ and the government. The rebound in shipments may help Prime Minister Shinzo Abe to raise the sales tax again after boosting it to 8% in April. The economy is forecast to expand an annualized 2.9% this quarter after contracting 6.8% in the April-June period, as consumers and businesses cut spending after the tax increase.

Japan's imports rose 2.3% in the year to July, compared with a median forecast for a 1.7% annual decline, as energy imports grew. That brought the trade balance to a deficit of 964 billion yen.

CAD

"Overall, the domestic economy remains lethargic. The business sector seems to be holding back on hiring and investment, governments are by and large in restraint mode, and households are seeing their purchasing power erode."

- Glen Hodgson, senior vice-president and chief economist at the Conference Board

Canada wholesale sales soared for a third consecutive in June, advancing 0.6% to $53 billion from May and volume of sales rose 0.7%, with increases in most sectors offsetting drops in autos and personal and household goods. Statistics Canada also revised up May's figure to 2.3% from 2.2%. The 2.4% decline in the auto industry followed a gain of 9.8% in May. Excluding autos and parts, wholesale trade rose 1.2 %. One of the key contributors to the positive data was the agricultural supplies industry, which surged as much as 4.9%. The upbeat data add to reports of growth in Canada’s merchandise trade surplus, building permits and manufacturing sales, pointing the world’s 11th economy rebounded in the second quarter after a tough winter undermined production. Last week Statistics Canada reported that manufacturing sales had posted another rise in June, as sales increased 0.6% to $52 billion, following the upwardly revised 1.7% advance a month earlier. Canada's June trade surplus widened on higher export volumes, overshooting expectations and hitting its highest dollar value since December 2011. Nevertheless, the central bank has said it will take about two years for the Canadian economy to return to full output as investment and exports grow.

Following the release of the data, the Canadian Dollar was little changed against its U.S. peer, with USD/CAD easing up 0.02% to fetch 1.0944.