Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"A scenario where a Syriza-led government leads to economic and political volatility could limit the appeal of Podemos among undecided voters and constrain the growth potential of the new party”

-Antonio Barroso, an analyst at the consulting firm Teneo Intelligence

The Euro dived to the lowest level in 11 years versus the US Dollar as Greece’s anti-austerity Syriza party won the general election on Sunday. Now the big question is whether Greece will stay in the Euro zone, as Syriza’s leader Alexis Tsipras is seeking to replace the bailout plan, which expires on February 28, with a new agreement that eases austerity and relieves Greece’s debt burden. However, Tsipras has abandoned talk of leaving the Euro bloc and highlighted that his government wanted negotiation, not confrontation with international creditors. Germany, the biggest creditor to the rest of the Euro zone, said that it is not prepared to renegotiate the bailout terms, raising the prospect that Greece could end up exiting the Euro zone. Germany also indicated that it is calm about a Syriza victory and that the Euro could cope with a “Grexit” without leading the whole currency to collapse. Additionally, the European Central Bank deployed a massive programme of quantitative easing last week and many investors feel that the financial markets can cope with the new, radical Greece.

Meanwhile, German business executives remained optimistic in January, with the German Ifo Business Climate Index, which based on a survey of manufacturers, builders, wholesalers and retailers, rose to 106.7 in the month under review, beating economists’ expectations for a 106.5 reading.

USD

“Over the next year or two, deficits should stay pretty low, and that should be very encouraging”

- Gennadiy Goldberg, U.S. strategist at TD Securities

The Congressional Budget Office expects that the budget deficit of the world’s number one economy will shrink for a fifth consecutive year in 2016, marking the longest stretch of improvement since the surpluses of the late 1990s, as declining unemployment rate helps boost revenues. The fiscal shortfall will fall to $468 billion this year, or 2.6% of the nation’s gross domestic product, compared with $483 billion in the year ended September 30 and $469 billion estimated in August. When the US President Barack Obama took office, the deficit amounted more than $1 trillion, whereas next year the gap is projected to be $467 billion, compared with $556 billion recorded in August. However, the budget deficit is seen swelling in coming years due to rising costs for debt and fast-retiring baby boomers. Republicans now in control of Congress aims to eliminate deficits within a decade with a reduction of social safety net programmes while lowering tax rates and increasing military spending. President Obama and Democrats have proposed new education and infrastructure spending and tax bonanza for middle-class Americans to set the agenda for the 2016 presidential election.

The CBO forecasts economic growth of 2.9% in the fourth quarter of 2015 compared with the previous year, a slower expansion that the 3.4% projected in August. In 2016 growth pace will remain the same as this year, the CBO projected.

GBP

“I wouldn’t be surprised if inflation falls more sharply in the short term, but then as growth picks up, the growth effects boost inflation more in the medium term”

- Kristin Forbes, member of BoE’s Monetary Policy Committee

Kristin Forbes, the Bank of England’s Monetary Policy Committee, hinted that interest rates in the UK may start rising sooner than expected amid improving global economy. As a result, the British Pound strengthened for the first time versus the US Dollar, gaining 0.2% to $1.5013. Forbes is optimistic about the world’s economic prospects given strong growth in the US, as well as potential for falling oil prices to spur consumption and investment in the UK, “as decline in oil prices will lead to a redistribution of income and demand away from net oil exporters toward net oil importers.” Plunging oil prices in the UK have brought the inflation rate to the lowest level in more than a decade, which would further bring down consumer prices in the near term. However, rates would eventually rebound, potentially breaking above the 2% inflation target, Forbes said. The UK economy will keep momentum throughout this year, as low inflation should spur spending and investment, resulting in a stronger argument for an earlier rate lift than market participants expect at the moment to halt inflation from overshooting the BoE’s 2% inflation goal.

The BoE has held interest rates at a record low 0.5% since early 2009. The central bank plans to normalize the monetary policy by a low and incremental increase of interest rates. Investors expect the rates to start rising in the mid-2016.

JPY

“Today's data suggest that the manufacturing slowdown is still ongoing amidst weak domestic demand”

-Hongbin Qu, economist at HSBC

Japan’s trade balance deficit reached a record high of $109 billion over 2014, marking the fourth consecutive annual shortfall, amid increased import prices and huge post-Fukushima energy costs. Exports rose 4.8% to $620 billion, whereas imports gained 5.7% to $763.7 billion in 2014. Fuel costs had a serious impact on Japan as it struggles to close the gap after the 2011 atomic crisis, forcing Japan to abandon its nuclear source, which accounted for more than a quarter of total power supply. The Yen weakened over the 2014 to 117 versus the US Dollar, making exports cheaper and import costs higher, especially on energy. The trade deficit, however, halved in December to 660.7 billion yen, compared to the previous year, the main reason for which were slumping oil prices. Exports increased better than expected, by 12.9% in the last month, also contributing to the trade deficit compression. The deficit is expected to narrow even further due to falling prices on crude oil, that lost around half of its value to less than $50 per barrel, are not fully reflected in the cost of imported petroleum. Meanwhile, minutes showed that the quantitative and qualitative monetary easing has been having its intended effects, therefore the BoJ will continue with the QQE in order to achieve price stability target of 2%. The CPI will remain lower due to slumping prices of crude, whereas the limit of outstanding loans will be increased by the bank from 7 trillion to 10 trillion yen, as well as doubling the amount of funds offered to each institution under a separate growth programme.