Daily Forex Fundamental Overview

Fundamental Analysis

Key highlights of the week ended July 31

US

US economic growth accelerated in the April-June quarter as an increase in consumer spending offset the drag from weak business spending on equipment. The US GDP rose a 2.3% annual rate, while the first-quarter economic output was revised to show a growth of 0.6%, up from a negative 0.2%. The Fed remains on track to hike interest rates later this year, with odds rising that the decision will come as soon as its next monetary policy meeting in September, as the US economy continues to perform in line with expectations. The decision to keep rates near at all-time low for at least a few more weeks was unanimous, supported by all ten voting members of the FOMC. Nevertheless, a number of those policy makers have said in recent months that they do not think the Fed should wait much longer.

UK

British economic growth accelerated in the second quarter, fuelling speculation about the first rate hike in interest rates since the financial crisis. The UK economy grew by 0.7% in the April-June period, compared with the 0.4% expansion in the beginning of the year. Measured on an annual basis, economic output rose by 2.6% in the second quarter. The economy's pickup was driven by the services sector, which disappointed in the first quarter, but now looks set to benefit from low inflation and higher earnings. The industrial sector also enjoyed a solid recovery, as the extraction industry in the North Sea recovered after months of low oil prices. Mining and quarrying activity rose at the fastest pace in more than 25 years, supported by tax cuts for oil and gas producers introduced in March. The BoE's Monetary Policy Committee will share its view on rates on 6 August, with expectations increasing that there could be a split among its nine board members.

Eurozone

Business confidence in Germany, the Euro zone's biggest economy, improved more than predicted in July as concerns over Greece have subsided, suggesting a solid growth in the German economy this year. The GfK business climate index climbed to 108.0 this month, up from a revised 107.5 in June and compared with economists' median forecast of 107.5. At the same time, even though German consumers remained optimistic, they voiced concerns about the country's economic situation due to uncertainty about Greece's financial stability. The GfK forward-looking consumer confidence index remained flat at 10.1 points for August from July. However, the poll of 2,000 consumers revealed a significant decline in economic expectations, which decreased by 6.5 points this month and have lost almost 20 points in two months.

Japan

Japan's household spending unexpectedly declined and inflation stalled last month, adding to signs the world's third biggest economy may have contracted in the second quarter and questioning the Bank of Japan's view that the growth will recover robustly in the current quarter. Annual core consumer inflation, which includes oil products but excludes volatile fresh food prices, climbed 0.1% in June, slightly beating market expectations of a flat reading. However, core consumer prices in Tokyo, a leading indicator of nationwide inflation, slid 0.1% this month, marking the first annual drop since April 2013.

EUR

“Eurozone unemployment disappointingly rose 31,000 in June, which was the first increase since September 2014 and the largest increase since July 2014. This followed drops of 65,000 in May and 135,000 in April”

- Howard Archer, IHS Economics

Consumer inflation in the Euro zone barely climbed from the previous year in July, while the number of unemployed rose in June, adding to signs that the ECB’s QE programme has yet to deliver the desired results. According to Eurostat, consumer prices in the region were 0.2% higher than in July 2013, considerably below the central bank’s goal of just under 2%. Inflation was subdued by a renewed decline in energy prices, which dropped 5.6% from a year earlier. Nevertheless, there were signs that the prices of other goods and services have begun to tick up. Excluding prices for volatile energy, food and alcohol, the core annual rate climbed to 1.0% from 0.8%.

A separate report showed the number of people without jobs in the Euro bloc increased in June by 31,000, while the jobless rate remained intact at 11.1%, maintaining its lowest level in three years. The number of unemployed in Germany surprisingly rose by 9,000 in July, whereas the unemployment rate remained unchanged at its record low of 6.4%. The reading came in much worse than analysts' predictions for a 5,000 decline. The unemployment rate in Italy, the third largest economy in the Euro bloc, also worsened. The number of registered unemployed in June made up 12.7% of the economically active population. Yet, Greece remains a record-holder, with the jobless rate at 25.6%.

USD

“Consumers still see the future income gains as their primary problem going forward”

- Richard Curtin, director of the Michigan Survey of Consumers

US labour costs rose at the slowest pace in 33 years in the second quarter on lacklustre gains in the private sector, putting a September interest rate increase into question. US workers’ compensation rose a mere 0.2% in the April-June period, below economists’ forecast for a 0.6% gain, and following the 0.7% increase in the first quarter. In annual terms, the employment cost index climbed 2%, compared with 2.6% recorded in the preceding three-month period. The Fed is closely watching wage figures as it moves closer to lifting interest rates from near-zero An acceleration in wages would signal the labour market is finally close to healthy, and could urge the Fed to act sooner rather than later to avoid an overheating economy. However, the latest slowdown suggests slack remains in the jobs market and could bolster the case for officials to wait longer to raise rates.

A separate report showed that US consumer morale declined in July as Americans’ expectations worsened to the lowest level in eight months. According to the University of Michigan, the final index of consumer sentiment dropped to 93.1, down from 96.1 in June. Nevertheless, the barometer has held above 90 fro the eight consecutive months, the longest such streak since a 17-month period ended in early 2005.

CAD

“The Canadian economy isn't out of the woods just yet”

- Nick Exarhos, CIBC economist

The Canadian economy shocked markets, as the data showed a fifth negative GDP reading in a row. Statistics Canada reported that the economic output shrank 0.2% in May, after contracting 0.1% in the preceding month. Analysts, however, had expected a flat reading in the reported month. Measured on an annual basis, Canada’s economy grew 0.5%, compared with the 1.2% recorded in April. The data increased chances that the economy slipped into recession in the first half of the year. The major drag came from Canada’s manufacturing sector, which contracted 1.7%. Overall, goods-producing industries fell 0.6% in May, down for a fifth straight month. At the same time, the service-providing industries dropped 0.1% in May after growing for three consecutive months. Low oil prices, a falling Canadian Dollar and diminished exports have hit the economy hard this year.

The bleak data supported the Bank of Canada's July decision to slash its benchmark interest rate by another 25 basis points to 0.5% to cushion the economy in light of poor estimates. The central bank also downgraded its second quarter growth forecast from a positive 1.8% to a negative 0.5% as well as revised Q3 from 2.8% to 1.5%.

CNY

“July data signaled that the downturn in China's manufacturing sector intensified at the start of the third quarter”

- Caixin

Business activity in China’s manufacturing sector plunged to the lowest level in two years in July, adding to further signs of the economic slowdown in the Asian giant in the third quarter. The final reading of the Caixin PMI came in at 47.8 for the reported month, down from 49.4 recorded in June, and was the weakest indicator since July 2013. The manufacturing activity barometer comes at the time of a sharp and profound decline in China's stock market, with the broad Shanghai Composite equity market index plummeting some 28.5% since June 11. Analysts said that the precipitous slide in the stock market in late June and July probably had an impact on sentiment, adding to pressure from an already-weak property market and dull domestic and overseas demand. Moreover, the additional signals of manufacturing weakness could prompt the Chinese government to redouble attempts to kick-start the world’s second biggest economy with more spending and relaxed monetary-policy measures. The key manufacturing sector has been a major drag on the economy's less-than-stellar performance, reflecting overcapacity in traditional heavy industry such as steel and cement as well as weak demand for exports of the country's light-industrial products.

Meanwhile, the non-manufacturing PMI measuring activity in the services sector and construction climbed 0.1 points to 53.9 in July.