Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“The ongoing slump in oil prices is adding to downward pressure on inflation globally and should further strengthen the bias for an easy monetary policy stance”

- Barclays

Eurostat confirmed that Euro zone’s consumer prices rose 0.3% in November from the same month last year on falling fuel and heating oil prices, which subtracted 0.22 percentage point from the final result. Measured on a monthly basis, inflation in the Euro bloc fell 0.2%, compared with a 0.1% decline in October. Excluding energy, food, alcohol and tobacco, core consumer prices rose 0.7% in November.

A growing number of economists are concerned that the Euro area could slip into deflation next year, as falling oil prices add to the disinflationary pressures in the region. Many economists expect the ECB to expand its asset-purchase programme early next year, which might include sovereign bonds buying. However, the central bank's governing council remains split by disagreement over the necessity of more actions now, with some policy makers preferring to remain in a wait-and-see mode to assess the full effect of recent monetary easing measures. Nevertheless, the ECB said it will reassess the existing stimulus policies, which include cheap bank loans as well as purchases of asset-backed securities and covered bonds, in early 2015, and decide whether to step up efforts to ensure that annual inflation moves closer to the goal of just below 2%. However, further decline in the Euro zone inflation will add pressure on the ECB to take more decisive and radical measures.

USD

“However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated”

- FOMC statement

Concluding the FOMC’s two-day meeting, Fed Chairwoman Janet Yellen said that the US central bank plans to hike interest rates next year, but it would take a patient approach in deciding on a timing of the first rate hike, which would not take place any earlier than late April. Yellen’s comments along with the FOMC statement indicated that the Fed was not inclined to start normalizing its monetary stance more quickly despite recent upbeat economic data, including stronger employment growth and falling oil prices. Still-elevated unemployment rate and below-target inflation provides the central bank with flexibility to take gradual approach to lifting rates. The FOMC statement also showed that the overwhelming majority of policy makers expect the Fed to raise the federal funds rate by 0.75-1.75 percentage points in 2015. Meanwhile, recent decline in gasoline costs pushed US consumer price inflation lower in November, which fell the most in nearly six years. According to the Labor Department, its consumer price index dropped 0.3% last month, the steepest fall since December 2008, after being flat in the preceding month. Measured on an annual basis, CPI rose 1.3%, the smallest increase since February, following the 1.7% advance in October. Stripping out volatile food and energy prices, the core CPI was in line with estimates, rising 0.1% during the reported month, down from 0.2% in October. In the 12 months through November, core CPI climbed 1.7%, keeping its pace of growth, falling slightly from October's 1.8% rise.

GBP

“The recent sharp fall in the oil price should support global and U.K. growth”

- Mark Carney, BoE Governor

The vote of the MPC remained unchanged in December, with the majority of policy makers believing that weak inflation outlook warranted maintaining interest rates intact at all-time low of 0.5%. The BoE officials, however, voted unanimously to keep the size of its asset purchases unchanged at 375 billion pounds. Martin Weale and Ian McCafferty reiterated their call for a lift in the benchmark rate to 0.75% to keep a lid on future inflationary pressures. Earlier in the week, the Bank of England Governor Mark Carney said the UK economy could benefit from the recent slump in oil prices, which is seen boosting consumers’ spending power and supporting the global demand. Meanwhile, the majority on the board concluded that subdued pay growth, plunging commodity prices are likely to keep inflation weak. Inflation was likely to fall below 1% in December, far below the BoE 2% goal, and stay lower than previously estimated, officials said. British inflation unexpectedly fell to 1% in November, the lowest level in more than 12 years. In the meantime, the UK’s unemployment rate remained steady at 6.0% against analysts’ expectations of a decline to 5.9%, as wages continued to climb and the number of people seeking unemployment benefit dropped more than expected, according to the Office for National Statistics. Total pay including bonuses rose by 1.4%, compared with last month's 1% rise. Regular pay, which strips out bonuses, climbed in line with expectations by 1.6%.

JPY

“I still expect shipments to remain firm as the U.S. economy continues to help spur output in Asia and Japan. That will be welcome to Japanese policymakers”

- Hiroshi Watanabe, senior economist at SMBC Nikko Securities

Japan logged its 29th consecutive trade deficit in November despite a slight decline of imports due to the recent fall in crude oil prices. The unadjusted gap in trade widened to 891.9 billion in November from the October's revised 736.9 billion yen shortfall. The seasonally-adjusted trade deficit narrowed slightly to 925.0 billion yen from the revised 985.1 billion yen.

Japan's exports rose for a third consecutive month in November from the previous year, but much more slowly than projected and despite a sharp plunge in the Japanese Yen as weak demand in Asia and Europe dampened trade. Exports surged 4.9%, largely on shipments of electronic components, optical equipment and machinery, whereas volume was still down 1.7%. Japan's costs for oil imports plummeted 22% in November from a year earlier, lowering total imports by 1.7% from the previous year to 7.1 trillion yen, the first downturn in three months. Energy costs have weighed heavily on Japan as the resource-poor country struggles to plug a yawning energy abyss after the 2011 Fukushima disaster forced the shutdown of nuclear reactors, which once supplied more than a quarter of its power. The Japanese Yen's sharp fall has exacerbated the problem further, as it hiked the cost of imports purchased in foreign currencies. The Yen trades currently at the lowest level in seven years versus the US Dollar.

CAD

“The recent dive in crude oil prices is an unprecedented development for the Canadian economy”

- CIBC economists

Wholesale sales in Canada increased in October, led by higher prices for live animals that pushed agricultural receipts to record high. Sales climbed 0.1% to C$54.2 billion, Statistics Canada reported, as farm products, which were the largest contributor to gains, soared 13.5% to C$815 million. Live-animal prices in the raw materials price index surged 24.6% in the reported month from a year earlier. Wholesale sales have risen 7.5% over the last 12 months through October. The surge comes as policy makers including Bank of Canada Governor Stephen Poloz said that sustained momentum in exports and business investment is required to complete an economic recovery over the next two years. The volume of wholesale sales, which strips out the impact of price changes, shrank by 0.1%.

However, other relevant data for the monthly gross domestic product outlook failed to provide positive support. Canadian factory shipments dropped more than projected in October, largely owing to a decline in production of aerospace products, following a record increase in the preceding month. Sales fell 0.6% to $52.7 billion, Statistics Canada reported earlier in the week. At the same time, Canada's trade surplus narrowed in October, driven by a jump in imports of consumer goods and aircraft. Overall, imports climbed 0.5%, while exports grew 0.1%, resulting in a $99 million surplus.