Daily Forex Fundamental Overview

Fundamental Analysis

Overview of the previous week’s key economic events

The previous week brought into light shaky political situation in Europe. French President ordered his Prime Minister Manuel Valls to form a new government as a response to the recent comments of outgoing Economy Minister Arnaud Montebourg, who criticized France's economic direction as well as Germany's economic policies of austerity measures, which dragged France and Europe into the worst economic crisis since the 1929 Depression. Meanwhile, more than 130 businesses spoke out against Scotland's independence, marking the biggest intervention by the U.K. business community into the referendum debate thus far. These political events come as the ECB is weighing to embark on QE to revive the growth in the 18-nation bloc and prevent the economy from falling into deflationary spiral, as inflation cooled further to 0.3%.

The world’s number one economy continues to surprise markets and economists. Thus, the U.S Commerce Department said that the U.S economy expanded faster than first thought, growing by 4.2% in the second quarter and beating the government's initial reading of 4%, following a 2.1% contraction in a period before. Meanwhile, the Congressional Budget Office expects the U.S. economy to grow by just 1.5% in the whole 2014, impaired by a weak performance during the first three months of the year. The new economic forecast was considerably more gloomy than the Obama administration's, which predicted last month that the economy would grow by 2.6% this year even though it contracted by an annual rate of 2.1% in the first quarter.

EUR/USD continues to fluctuate within a tight range this week—between 1.32 and 1.3150. And even though the daily and weekly studies are mostly pointing South right now, there is a good chance the currency pair is going to re-visit the resistance at 1.33 before launching an attack on the 2013 Sep low at 1.31. If this support is broken, the Euro will be expected to set course towards 1.2750, which is the last year's trough.

While the Japanese economy has been faltering recently, inflation is stalling and economic outlook has dimmed further, analysts weigh whether the Bank of Japan will ease monetary policy this year or wait until 2015 to kick-start growth. Economists believe that the central bank will fail to reach the desired 2% inflation goal before April, and thus the BoJ will be forced to make the policy even more accommodative. The central bank cut its growth outlook for this fiscal year to 1.0% and expect the economy to expand at the 1.5% pace next year.

EUR

“Unemployment is at the heart of the macro dynamics that shape short and medium-term inflation”

- Margio Draghi, European Central Bank President

The latest Eurostat data release reported no change in unemployment rate across 18-nation Euro bloc in comparison with the previous month, therefore staying at 11.5% mark, with 18.4 million jobless people. In comparison with the same period a year ago, unemployment decreased from 11.9%, or by 725,000 persons. Although unemployment has not increased for a long period, experts react negatively by underlying Europe's troubles in the labour market. The lowest unemployment rate was recorded in Germany and Austria, both at 4.9% level, and the highest in Greece and Spain, 27.2% and 24.5%, respectively. Compared with the same period a year ago, unemployment rate decreased in 22 countries, increased in three and remained unchanged in three. Mario Draghi, ECB President, issued a warning by stating that high unemployment stagnation could possibly transform it into structural, additionally pointing out that unemployment is key element of macro-economics, and a necessary tool in dealing with inflation. Furthermore, in the Spring Economics Forecast, the European Commission forecasted unemployment rate to be at 11.4% level in 2015, suggesting that underlying jobless issues are no yet resolved.

Separately, another report indicated that inflation dropped to a fresh five-year low, as consumer prices rose only by 0.3% year-to-year in August, following an increase of 0.4% in July, making it the weakest link since 2009.

USD

“Consumers do face some constraints”

- Michael Carey, chief economist for North America at Credit Agricole CIB

The latest U.S. Commerce Department numbers indicated a slight decrease in consumer spending, falling behind experts’ forecasts, following continuous growth in six-month period before. Experts explain the phenomena by stating that households are lagging behind as wages fail to accelerate. Household spending decreased by 0.1% in July compared to an expected increase of 0.1%, after edging up 0.4% in June. Spending on durable goods declined by 0.6%, following the 0.5% increase in June. Spending on non-durable goods, such as fuel and clothing, fell by 0.2%, while spending on services decreased by 0.1%. Prices related to consumer spending surged by 1.6% year-on-year in July. However, Federal Reserve policy makers predicted an annual increase of 2%. The core price category, which excludes items such food and fuel, inched up by 0.1% in July, and ended at 1.5% year-on-year.

Another data release by U.S Commerce Department reported an increase in personal income by 0.2%, yet falling short behind experts’ forecast of a 0.3% increase and following an upwardly revised gain of 0.5% in June. Additionally, data provided clear evidence that income grew faster during the second quarter beating experts’ predictions, from 0.4% to 0.5%, respectively. However, March and February readings were revised down. Furthermore, data reports that income from investments grew at the slowest pace since January; rental income rallied up by 0.9% and wages grew at the slowest pace in three months.

GBP

“While this is still below the 11.8% recorded in June, house price growth continues to outpace earnings by a wide margin, with average wage growth running at less than 1% in recent months”

- Robert Gardner, Nationwide's Chief Economist

Nationwide survey showed that U.K. house prices rose at a much faster monthly pace than projected in August, contrasting with other signs of cooling housing market. Prices rose as much as 0.8% over the month after the 0.2% increase in July. While monthly data can be volatile, the annual gauge also soared in August from 10.6% to 11%. The average house price across the U.K. is now £189,306, rising £357, or 0.8%, in just a month. This is up from the 0.2% increase in July, and marks the sixteenth consecutive monthly advance. Despite property values reaching record highs over the summer period, there have also been signs of a cool down in the housing market in recent months. Mortgage approvals fell after stricter lending rules, which force lenders to ask for more information about a mortgage applicant's spending, were introduced at the end of April, but approvals have since rebounded slightly. Nationwide said it is still unclear how much of the cooling in activity was due to the introduction of the new ‘Mortgage Market Review’ rules as opposed to an underlying loss of momentum in the market.

According to a separate survey from Hometrack, the gap between house sellers' asking prices and the amount buyers are willing to pay is widening amid increasing signs the market is cooling. Hometrack said that the findings suggest that the market will see the momentum of house price growth slowing in the coming months, as opposed to prices starting to fall.

NZD

“The economy is clearly past its growth peak"

- Cameron Bagrie, ANZ's chief economist

Business sentiment in New Zealand dropped in August of the current year, decreasing for the sixth consecutive month, while the country’s economy rebounds at a slower pace than expected. The ANZ Bank’s survey revealed that 24.4% of companies predict the business conditions to improve, down from 39.7% a month ago. In July the Treasury of New Zealand worsened their forecast for economic growth in the year ending March 31, 2015 from 4% to 3.8%. Among largest sectors of local economy, the service industry confidence has been the most optimistic, with 41.4% of all companies expecting the environment to improve in the nearest future. Agriculture accounts for a very considerable part of country’s economy, however, local farms forecast the business conditions to get worse, namely 34.4% of them.

At the same time, a number of economists point on negative impact from rising interest rates, as New Zealand has been the first developed economy to raise OCR. Right now the official interest rate is 100 basis points higher than in January of this year. Moreover, the economy suffers from a strong national currency and it puts pressure on exports and the trade balance as a whole, while the country is dependent on mining and dairy products’ international deliveries. Previous week’s data showed the balance of trade in New Zealand to be on a negative side for the first time in nine months.

CAD

"Before we get too revved up on these encouraging results, note that the average GDP growth for the first half of the year still clocked in at a mild 2 per cent pace”

- Doug Porter, BMO Financial Group’s chief economist

The Canadian economy expanded in the second quarter, after being knocked down in the beginning of the year, as household spending and exports fuelled the strongest quarterly economic growth in more than two years. On an annual basis, Canada’s GDP rose 3.1% in the three months through June, beating experts forecasts for a 2.7% growth and following the meagre 0.9% growth rate in the first three months of the year, when harsh winter weather battered the nation’s economy. According to StatsCan, consumer spending was robust, particularly on durable goods, turning in the strongest performance since the second quarter of 2013. Meanwhile, exports soared 4.2% in the April-June period, translating into an annualized rate of 17.8%, following a slight drop in the first quarter. This is the last significant data release officials at the Bank of Canada receive before they consider their policy stance this week.

It is possible the second quarter will show a turning point in the North American economy. The U.S. grew at an annual rate of 4.2% in the second quarter, suggesting strong demand from Canada’s largest trading partner. The prospects of steady sales could encourage businesses to overcome their caution and boost investment. However, the Bank of Canada will not shift its policy stance until it sees proof of that.