Daily Forex Fundamental Overview

Fundamental Analysis

Key highlights of the week ended August 28

US

The US economy grew more than previously estimated in the second quarter, supported by robust consumer and business spending. The world's number one economy expanded at an annual rate of 3.7% in the April-June quarter, more than a percentage point greater than the 2.3% originally estimated. It was the strongest growth since last summer and marked a great improvement from the anaemic 0.6% increase during the January-March quarter when a harsh winter undermined activity. Economists believe growth has slowed in the current quarter to around 2.5%. Some have expressed concern that shrinking global stock markets and a steep slowdown in China will further weaken the economy in coming months. The revision for second quarter growth reflected an advance in consumer spending, which rose at annual rate of 3.1%, up from a 1.8% growth rate in the first quarter. Business investment in structures and equipment was revised higher to show growth of 3.2%, while housing construction was revised up to a surge of 7.8%.

China

The People's Bank of China injected 140 billion yuan into China's economy last Wednesday, in latest attempt to prop up slowing economic growth, fuelling investors concerns over a "hard landing". The PBoC injected billions of yuan into the interbank money market through a short-term liquidity operation. The central bank introduced SLOs in 2013 as a supplement of its monetary policy tools in a bid to smooth fluctuations in liquidity and stabilize interbank funding costs. In addition to that, the central bank cut the one-year benchmark bank lending rate by 25 basis points and reserve requirements by 50 basis points for most big banks. The People's Bank said that the interest rate cut was to reduce "the social cost of financing to promote and support the sustainable and healthy developments of the real economy". It also acted to raise the flow of money in the economy by cutting the amount of cash banks must keep in reserve, effectively freeing them to lend more cash.

UK

The second estimate of Britain’s GDP showed no revisions to both quarterly and annual readings of economic growth. The UK economy was confirmed as one of the fastest growing western countries in the second quarter, as economic output expanded 0.7% between April and June, marking the tenth straight quarter of positive growth. Measured on an annual basis, the economy grew 2.6%. Growth in the June quarter was primarily supported by a strong services sector, climbing 0.7% and contributing to quarterly growth with 0.6 percentage points. The UK economy is predicted to remain resilient this year supported by "twin engine" of increased household spending and strong investment growth, according to the Confederation of British Industry, which forecasts an interest rate hike in early 2016. The CBI upgraded its growth outlook for the British economy. The business lobbying organisation now expects the UK economy to expand 2.6% this year up from 2.4% predicted in June. The CBI also improved its forecast for 2016, estimating GDP growth of 2.8%, up from 2.5%. Quarterly growth is anticipated to increase at an average pace of 0.7% through to the end of 2016.

EUR

“Capital controls and a higher fiscal burden will weigh on consumption in the second half. But the reading will cushion the full-year performance from an expected slowdown in economic activity in the second half”

- Nikos Magginas, National Bank economist

Greece’s economy surprisingly grew both on an annual and quarterly basis in the second quarter, escaping technical recession, whereas unhealthy high unemployment, deep deflation and political woes were expected to take a toll on the debt-stricken country's economy. Greece’s GDP rose 0.9% on a quarterly basis after a revised flat 0.0% growth in the beginning of the year. Measured on an annual basis, the Greek economy expanded 1.7% compared with a modest 0.2% rise seen previously. The nation’s economy is predicted to contract 2.3% in 2015 as the third quarter has been particularly harsh due to bank closures and capital controls. Officials estimate GDP to shrink 1.3% next year, citing the latest numbers of the creditor institutions that have been negotiating Greece's new bailout scheme, including the European Commission, the European Central Bank and the International Monetary Fund. Only in 2017 the country’s economy is expected to return to growth, adding 2.7% that year followed by a robust 3.1% expansion a year later.

Meanwhile, consumer prices in Germany remained unchanged in August, following the 0.2% gain a month earlier. In annual terms, consumer inflation in the Euro zone’s number one economy inched up 0.2% in August, according to the preliminary print. In July, the gauge added 0.2%.

USD

“All of the data are heading in the right direction. Except for inflation.”

- Jennifer Lee, senior economist at BMO Capital Markets

US consumer spending rose a bit in July as households purchased more automobiles, adding to further evidence of strength in the economy that could keep the door open to a Fed interest rate hike this year. The Commerce Department reported consumer spending—the lifeblood of the US economy, which accounts for more than two-thirds of US economic activity, climbed 0.3% following an upwardly revised 0.3% increase in June. Meanwhile, personal income, reflecting Americans’ pre-tax earnings from salaries and investments, rose 0.4%, replicating the gains of the previous three months. The price index for personal consumption expenditures, the central bank’s preferred inflation gauge, inched up 0.1% from June and 0.3% from a year earlier. Core prices, which excludes food and energy costs, ticked up 0.1% from June and 1.2% from a year earlier. July marked the 39th straight month in which prices have undershot the Fed’s 2% annual target. Other data suggest underlying strength in the US economy. Gross domestic product expanded 3.7% in the second quarter. Retail sales increased healthily in July, and the housing market is showing momentum, with robust pickups in sales of existing and new homes last month. At the same time the labour market continues to show strength. The latest data is likely to influence debate within the Fed about when and how quickly to hike short-term interest rates.

GBP

“The new details published today are positive and very welcome. We saw strong growth in business investment and a large reduction in our trade deficit”

- David Kern, chief economist at the BCC

The second estimate of Britain’s GDP showed no revisions to both quarterly and annual readings of economic growth. The UK economy was confirmed as one of the fastest growing western countries in the second quarter, as economic output expanded 0.7% between April and June, marking the tenth straight quarter of positive growth, according to the Office for National Statistics. Measured on an annual basis, the economy grew 2.6%. Growth in the June quarter was primarily supported by a strong services sector, climbing 0.7% and contributing to quarterly growth with 0.6 percentage points. Both the volume and value of business activity within UK services rose in the quarter to August, suggesting this sector, which accounts for as much as 78% of the total economic output, is set to continue supporting the overall economic performance in the third quarter, the Confederation of British Industries reported. Meanwhile, household consumption unexpectedly decelerated to a 0.7% growth during the second quarter, and business investment rose 2.9% in the second quarter compared with the previous three-month period.

Economists expect slower growth in China to affect western economies through weaker trade, even though Britain is unlikely to be hurt much, as trade with China accounted for around 4% of all British exports in the last year, official figures show.