Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"German consumers feel that their economy is currently enjoying a renewed upswing"

- GFK

German consumer climate reached a new high of 9.3 points, a level unseen for 13 years. The consumer climate improved, with economic, income and willingness to buy rising. Slumping energy prices over the last few weeks had a significant impact on German consumers. Due to lower energy prices disposable income gained ground, giving consumers freedom to spend their capital elsewhere. Another reason for higher consumer confidence is a new uptrend movement in the country’s economy, with GDP and overall economic growth rising. The economy is expected to keep rebounding in the upcoming months, given continuously falling energy prices and cheapening Euro, thus boosting exports and companies’ willingness to invest. At the same time the income expectation also edged up in Germany this month, overshadowing the slight drop back in December. The reason for the increase was a sharp inflation fall along with stable employment. In the meantime the willingness to buy rose for the fourth consecutive time, adding 8.3 points, while the propensity to consume reached an eight-year high. According to the Federal Statistical Office, the outlook for the consumer economy is sumptuous and that Germany’s domestic economy will play a crucial role in the global economic development. Meanwhile, Germany's import price index declined more than anticipated on Wednesday, official data showed. The import price index slumped to -1.7% from -0.8% in the preceding quarter, beating expectations of -1.5%.

USD

“Economic activity has been expanding at a solid pace”

- Federal Reserve

While the Fed pointed out that the US economy was growing at a sustainable pace with solid job gains and lower unemployment rate, the central bank said that it would maintain short-term interest rates at record low at least until mid-year. In addition to labour, inflation and financial data, policy makers also highlighted that they would take into consideration international developments when thinking about the timing of the first interest rates hike, adding a reference to global markets for the first time in two years. An increasing number of economists expect that the date of the first rate lift could slip to September or even later. Many Fed officials have pointed to a possible rate increase around mid-year, but they also left the door open to a later move. The Fed has kept its benchmark rate near zero since 2008 to boost borrowing, spending and investment and fuel the recovery following the Great Recession.

The Fed's stance sharply contrasts to many central banks in developed countries that have recently eased monetary policy to support faltering economies, being led by the European Central Bank's 1 trillion euro quantitative easing programme to prop up the Euro zone's economy. The policy divergence has pushed the US Dollar to multi-year peaks, a looming concern on the US central bank’s radar as the move tends to have a negative effect on US exporters and inflation.

GBP

“They are historically low and they won't stay like that forever but when that rise comes it is going to be very gradual. It could be half a percent a year for several years."

- Andrew Haldane, BoE chief economist

Andrew Haldane, chief economist at the Bank of England, pointed that the benchmark interest rate will rise gradually over the course of the next couple of years in order to ensure a sustainable economic growth. Haldane said that the rate lift could be as slow as half a percentage point a year and did not expect interest rates returning to levels seen in 1980s or 1990s. The BoE has maintained interest rates at ultra-low of 0.5% for almost six years since the depths of the global financial crisis. Last week BoE Governor Mark Carney noted interest rates would need to rise over the course of the next three years to prevent inflation from overshooting the central bank’s 2% goal. Also, Kristin Forbes, an MPC member, said the UK interest rates may start rising sooner than many analysts expect if inflation rebounds strongly after its recent precipitous decline. In January, the BoE voted unanimously to keep the base rate unchanged at the all-time low of 0.5% versus market expectations of an ongoing split among policy makers. Both Martin Weale and Ian McCafferty unexpectedly joined the rest of the seven members saying that "low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank Rate at the current juncture." Meanwhile, economists expect that the central bank will keep rates at a historic low until at least October as inflation remains below the BoE’s target.

AUD

“Falls in commodity prices underlie substantial declines in mining confidence”

- Alan Oster, chief economist at NAB

Australia’s inflation climbed at a slower pace than expected in the final quarter of the year, dragging the annual headline rate below 2%. The nation’s CPI ticked up 0.2% in the December quarter amid a recent decline in petrol prices, with the softening inflation outlook providing the central bank with room to cut interest rates, which has been at 2.5% since August 2013, as early as next week. Measured year-on-year, consumer prices rose 1.7%, down from 2.3% and falling short of the Reserve Bank of Australia targeted band of 2%-3%. Nevertheless, the trimmed mean CPI, which strips out volatile components, climbed 0.7% in the three months through December, overshooting market’s expectations for a 0.5% gain. Last time Australia's headline CPI last slid below the RBA's target band was in the March and June quarters of 2012. Disinflation, along with faltering domestic growth, falling commodity prices and global uncertainty, has considerably piled pressure on the RBA to ease monetary policy in recent months. However, the central bank has left itself with little room for manoeuvre, with interest rates already at a all-time low, and reiterating throughout last year that stability in interest rates is the most appropriate course of action. Some economists suggested that lower inflation and a weak Aussie Dollar have already done the work of monetary easing, making an interest rate cut unnecessary. Others, however, say an interest rate cut would help boost investment and spending, and push the local currency even lower.

NZD

“The high exchange rate, low global inflation, and falling oil prices are causing traded goods inflation to be very weak”

- Graeme Wheeler, RBNZ Governor

The Reserve Bank of New Zealand kept the official cash rate unchanged and held a more neutral setting on interest, saying that it is ready to cut rates as falling oil prices damp inflation worldwide. The RBNZ maintained its benchmark rate at 3.5%, noting that it expects keep rates unchanged for some time, probably stretching an interest-rate pause into 2016, and that future rates movements, either up or down, will be dependent on economic data. The central bank’s Governor Graeme Wheeler reiterated that even though the New Zealand Dollar has depreciated recently, the local currency remains “unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals”. The RBNZ’s adoption of a neutral stance comes as inflation is predicted to slow sharply. Prices climbed just 0.8% in the final quarter of 2014 from the previous year, below the central bank’s forecast of a 1% increase. As oil prices sharply drops, the nation’s economy could be facing its first annual decline in consumer prices in 16 years.

In the meantime, New Zealand’s trade deficit contracted in December, but less than expected. The gap shrank to $159 million in December from $285 million in the preceding month, according to Statistics New Zealand, coming in worse than an expected $75 million deficit. Exports declined 6.9% to $4.42 billion from a year earlier, while imports jumped 7.6% to $4.58 on year in December.