Daily Forex Fundamental Overview

Fundamental Analysis

Highlights of the week ended May 23

US

The US economy's weakness in the beginning of the year persuaded most Fed policy makers that the economy would not show enough strength to justify hiking the benchmark interest rate in June. Yet, officials said that the slow start to the year was mostly triggered by temporary factors like harsh winter weather and disputes at West Coast ports. Central bankers expected a rebound in the coming months as the US Dollar weakened, supporting exports, according to the April policy meeting minutes. While the minutes showed a rate increase is not completely off the table, only a few Fed officials thought they would have enough confidence to begin raising interest rates at the June 16-17 meeting. Market participants are increasingly expecting the Fed to increase rates in September or beyond. Fed's minutes also showed that officials discussed whether the central bank should increase its 2% annual inflation target.

UK

The BoE predicted the UK economic growth to accelerate in the second quarter after a weak start to the year. The central bank estimated a quarterly growth in the three months through June to increase to 0.7%. Policy makers also expected slack in the economy is likely to fully eroded within a year, pointing to potential future price pressures that will spur policy tightening. BoE officials led by Governor Mark Carney said they see price-growth to resume towards the end of the year, fuelled by faster wage growth and a recovery in oil prices. Minutes of May's policy meeting showed the MPC expected annual inflation to accelerate "notably" towards the end of 2015 and return to its 2% goal by early 2017.

Canada

Stephen Poloz, BoC Governor, said the Canadian economy is headed in the right direction, and sustained recovery supported by non-energy exports should start by midyear, underlying that the rebound from the 2008-09 recession "has been a long voyage, and it isn't over yet." However, Poloz reiterated that uneven economic performance of Canada's top trading partner, the US, is clouding the nation's economic growth outlook. Another uncertainty is whether the negative fallout from the precipitous drop in oil prices has dissipated. Given oil is Canada's top export, further oil-related weakness would affect the BoC's call for a partial bounce back in growth in the second quarter, Poloz said. The central bank's January's interest rate cut from 1.0% to 0.75% is seen working, as positive economic momentum continues to build. The Bank of Canada is scheduled to deliver its next rate decision on May 27, and analysts increasingly expect the central bank to leave rates on hold.

Japan

The Bank of Japan refrained from adding more monetary stimulus and expressed more upbeat view on the world's third largest economy, as a rebound in consumption boosted services sector's sentiment to the highest level in a year. The central bank said it will continue to expand the monetary base at an annual pace of 80 trillion yen. According to the BoJ, inflation is set to hit the 2% target in fiscal 2016, with tight labour-market conditions and the pressure created on wage growth helping to reach this target. The central bank's forecasts also assume a rise in global fuel prices from current levels. The BoJ bought itself some breathing space last month when it postponed the timing for hitting its inflation target. Yet, the decision also questions its credibility as it jarred with its commitment to reach the price target in "roughly two years" since stepping up stimulus in April 2013.

EUR

“Structural reforms that reverse the downward drift in potential growth are now vital for the euro area, which is why I believe, as the guardian of the currency, we have a legitimate interest in talking about them”

- Mario Draghi, President of European Central Bank

Europe’s largest economy, Germany, grew by a quarterly rate 0.3% in the three months through March, down from 0.7% growth in the fourth quarter. Domestic demand supported Germany’s economy in the first quarter, as both private consumption and investment spending rose. Household consumption was up 0.6% as consumers felt upbeat due to an improving labour market, rising wages and lower energy prices, while government consumption also climbed by 0.7%. However, weak exports and falling inventories suppressed growth in the beginning of the year after an extraordinarily strong fourth quarter. Meanwhile, German economy captains remained optimistic in May, as Ifo Business Climate index fell less than expected. The headline measure of the mood in German business circles slid to 108.5 in May, slightly below the 108.6 recorded in April, whereas analysts had expected a decline to 108.3. Meanwhile, the Current Assessment sub-index, measuring current conditions in the Euro zone’s number one economy, came in at 114.3 points, following the previous month's figure of 113.9. Moreover, the Ifo Expectations Index, showing firms' projections for the next six months, booked 103.0, from 103.5 in April.

Meanwhile, Mario Draghi, ECB President reiterated European governments should step up efforts to overhaul economies, reform labour markets and contribute to economic flexibility.

USD

“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target”

- Janet Yellen, Fed Chair

US consumer prices slowed their growth in April amid weak gasoline prices, according to the Labor Department. Consumer price index climbed 0.1% last month after rising 0.2% in March. In the 12 months through April, consumer inflation dropped 0.2%, the largest decline since October 2009, after sliding 0.1% in March. The core CPI, which excludes volatile food and energy costs, ticked up 0.3%, the largest gain since January 2013, after climbing 0.2% a month earlier. Measured on an annual basis, the core CPI rose 1.8% following a similar gain in March.

In the meantime, Fed Chair Janet Yellen said the US central bank remained on track to hike interest rates this year, but will do so steadily, adding that she expected the world’s number one economy to recover after a surprisingly soft first quarter. Yet, she highlighted once again that the move continues to be dependent on the health of the job market and pace of inflation growth. Even though, the US economy is set to rebound, it faces a number of headwinds including disappointing wage growth and high number of people who seek full-time employment. Yellen said that "it will be several years" before the Fed's benchmark rate is back to normal, which is close to 4% in an economy that is performing strongly. Most economists continue to expect the Fed to raise the fed funds rate in September, which is consistent with Fed policymakers' median forecast two months ago.

GBP

“It should not come as a surprise that the Bank is undertaking such work about a stated government policy”

- Bank of England

The British economy is expected to close its output gap within next year, Mark Carney, Bank of England Governor said, adding that recent slowdown in inflation is due to a fall in food and energy prices. Carney forecast productivity to pick up, but it would not return to historical averages any time soon.

Meanwhile, Carney might face accusations in lack of transparency, after a secret BoE’s report was accidentally sent to the Guardian newspaper. The work is known as “Project Bookend”, managed by Deputy Governor Jon Cunliffe, was meant to assess potential risks related British exit from the European Union. The email also included guidance for how to rebuff questions from the public. The Bank of England said it would not talk about its assessment in advance but would disclose details “at the appropriate time,” adding it had taken a similar approach when it considered the implications of last year’s Scottish referendum. Prime Minister David Cameron is a referendum on EU membership by the end of 2017, and the BoE’s unfortunate mistake may drag Governor Mark Carney into the political debate. Yet, Cameron said he was confident he could strike a deal on EU reforms that satisfy his demands and those of the British people before holding the referendum. Still, many British business leaders are concerned about the possibility of losing access to their top export markets and there are also worries about the impact on Britain’s financial services industry.

CAD

“We saw good numbers out of wholesale and manufacturing and if retail sales show something decent, we could see 0.3% for monthly GDP”

- Nick Exarhos, CIBC World Markets economist

A sharp decline in energy prices put heavy pressure on Canada’s inflation in April, as cost of living fell to lowest level since October 2013. The consumer price index rose 0.8% in April from a year ago down from March’s 1.2% pace, according to Statistics Canada. The core rate, which strips out eight volatile products, ticked down to 2.3%, after 2.4% pace in March, which was the fastest since 2008. Falling energy prices were the major contributor to the deceleration, with the energy index plummeting 13.5%. Bank of Canada Governor Stephen Poloz said recently that it may take until around the end of 2016 before Canada’s economy reaches full output and consumer prices climb to the 2% target. The report is the last high-impact indicator before the next interest-rate decision on May 27, and economists expect the benchmark overnight rate to remain at 0.75% where it has been since a cut in January. The central bank sets interest rates to keep inflation in the middle of a 1% to 3% band. Last month the Bank of Canada said total inflation would average 0.8% this quarter and the core rate would average 2.1%.

A separate report showed retail sales rose more than expected, surging 0.7% to C$42.5-billion in March. The increase was supported by a 1.5% increase at motor vehicle and parts dealers.