Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“The central bank has already downgraded its projections for inflation which made it essential that he comfort markets by saying the ECB stands ready to do more if necessary”

- James Athey, Aberdeen Asset Management Investment Manager

The ECB kept interest rates unchanged at record low in line with expectations. During his birthday conference, Mario Draghi, ECB President, said that renewed downside risks emerged to the growth and inflation outlook in recent weeks. Therefore, Draghi dropped a clear hint that the central bank could expand its QE programme, given the new downside risks, and pointing out that the asset-purchase programme is flexible, and the ECB could change the size, composition and duration of the programme. The central bank downgraded its growth outlook to 1.4% in 2015 from 1.5%, while inflation was expected to slide to negative territory in the months ahead, but due to lower oil and commodity prices rather than full-blown deflation.

The Euro zone retail sales returned to growth in July following a downwardly revised 0.2% decline in the preceding month. Retail turnover rose 0.4% on month in July, slightly missing economists’ expectations for a 0.5% growth. Measured on an annual basis, retail sales surged 2.7% following the upwardly revised 1.7% growth in June. At the same time the bloc’s services sector continued to expand last month, reinforcing the view economic recovery is taking hold. The final reading of the Euro zone’s services PMI booked 54.4 points, compared with 54.0 in July. On top of that, Markit’s composite PMI, which measures activity in the manufacturing and services sectors, climbed to 54.3 in August, up from 53.9 in the prior month.

USD

“Businesses are still hiring, but it is not clear if Friday's report will give the Fed either an 'all-clear' or a 'let's go slow' signal”

- Joel Naroff, chief economist at Naroff Economic Advisors

The US trade deficit shrank to the lowest level in five months in July, as exports rose marginally, while imports dropped. The shortfall narrowed to $41.9 billion in July, booking a 7.4% decrease from a June imbalance of $45.2 billion, according to the Commerce Department. Exports climbed 0.4% to $188.5 billion, driven by stronger sales of US-made autos and machinery, while imports declined 1.1% to $230.4 billion. So far this year, the deficit is running 3.6% above the 2014 level, reflecting weaker export sales. Concerns are mounting that US growth will be hurt by further decreases in exports, reflecting a stronger Dollar and overseas weakness, particularly in China. A precipitous slowdown in China has shacked financial markets in recent weeks as investors have become worried that weakness in the world's second largest economy could have a more adverse effect on global growth.

Meanwhile, a separate report showed initial claims for state unemployment benefits surged 12,000 to a seasonally adjusted 282,000 for the week ended August 29. The four-week moving average of claims, considered a better measure of labour market trends as it strips out week-to-week volatility, rose 3,250 to 275,500 last week. It was the 23rd consecutive week that the four-week average remained below the 300,000 threshold, which is usually associated with an improving labour market.

GBP

“The services PMI came in well below even the most pessimistic of economists' forecasts and follows disappointing news of a stagnation in the manufacturing sector earlier in the week."

- Chris Williamson, chief economist at Markit

Growth in the UK services sector, the key pillar of the British economy as it accounts for around 78% of the nation’s economic output, unexpectedly slowed in August. Markit’s services PMI declined to 55.6 down from 57.4 in July, hitting the lowest level in more than two years. The gauge of new business in the services industry plunged to 56.2 in August, the lowest since April 2013, from 58.6 in July. The data also revealed business expectations among service companies at the lowest since February, while input-price inflation slowed for a third straight month to the weakest since January.

The recent manufacturing and construction data suggest the pace of economic growth is set to slow to 0.5% this quarter, from 0.7% in the three months through June. However, the Bank of England predicts a growth rate of 0.7% in both the second and third quarters. Meanwhile, NIESR said in its latest outlook that it expected UK GDP to slow down in the third quarter, but growth would remain 2.5% this year. The CBI revised up its outlook for the British economy to an increase of 2.6% this year, before accelerating further to 2.8% in 2016, driven primarily by rising business investments and productivity, as well as strong domestic demand.