Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“What matters is that central banks act within their mandates to fulfill their mandates”

- Mario Draghi, ECB President

The European Central Bank President Mario Draghi voiced another strong hint that the bank is ready to act decisively to combat weak inflation. Draghi said that even though inflation is low globally, it would not stop the central bank from adding stimulus to the Euro zone if necessity arises. Moreover, the risk of acting too late is greater than that of acting too early as a wait-and-see mode could result in a lasting loss of confidence. The ECB is currently reviewing its monetary policy actions and policy makers will decide on March 10 whether the current plan of negative interest rates and a 1.5 trillion-euro QE programme yield fruit. Meanwhile, the latest data showed consumer prices in the Euro area climbed an annual 0.4% in January and the rate is likely to turn negative in coming months. The reading has been below 1% for more than two years. While Euro zone’s unemployment dropped to the lowest level in four years in December, the region’s manufacturing and services industries lowered prices at the quickest pace in almost a year in January, underscoring challenges for the ECB to bring inflation to the targeted level.

Draghi said Japan’s experience showed how global monetary policy makers could underpin inflation if they were fully committed to doing so.

USD

“The slowdown in the services sector indicators may go a long way in fanning fears of a more pronounced slowdown to U.S. growth momentum heading into 2016”

- Gennadiy Goldberg, an economist at TD Securities

The number of Americans applying for unemployment benefits increased more than expected last week, signalling some loss of momentum in the labour market due to a steep economic slowdown and stock market rout. Initial claims for state unemployment benefits surged 8,000 to a seasonally adjusted 285,000 for the week ended January 30, the Labor Department reported. The prior week's claims were revised to show 1,000 fewer applications received than previously reported. Despite the increase last week, claims remained below 300,000, a level associated with strong labour market conditions, for the 48th straight week. That is the longest run since the early 1970s. The four-week moving average of claims, considered a better measure of labour market trends as it strips out week-to-week volatility, rose 2,000 to 284,750 last week. The data came ahead of the government's more comprehensive report on Friday. Economists predict that the report will show employers added 200,000 jobs and the jobless rate remained at 5.0%.

Meanwhile, productivity of US employees declined at the sharpest pace in almost two years toward the end of last year. Output per hour fell at an annualized rate of 3% in the fourth quarter, compared to a 2% plunge expected by the markets, and following a 2.1% increase in the third trimester.

GBP

“Global growth has fallen back further over the past three months as emerging economies have generally continued to slow and as the US economy has grown less than expected”

- Bank of England

The Bank of England revised its economic growth forecasts due to a gloomier global outlook. Moreover, the lone policy maker who had voted for a rate hike in recent months unexpectedly changed his mind. The BoE’s Monetary Policy Committee had voted 9-0 to keep rates on hold at a record-low 0.5%, where they have stayed for almost seven years. The central bank said sharp plunge in oil prices and equities, and significant risks in emerging economies, weighed on the global outlook, though sturdy domestic demand should ensure the UK growth still remained near its long-run average. The BoE forecast the UK’s economy would grow 2.2% this year and 2.3% in 2017, down from f2.5% and 2.6% in predicted in November and barely changed from 2015, when growth disappointed expectations. On top of that, the February Inflation Report lowered the short-term inflation outlook, with CPI at around 0.82% and 1.91% by the end of 2016 and 2017 respectively. The BoE expects inflation to exceed the 2% goal during the first quarter of 2018 for the first time.

Discussing monetary policy tools the central bank has at its disposal, the BoE Governor Mark Carney said that interest rates were not at the lower bound, meaning they could be cut further. However, Carney highlighted that policy makers did not consider negative rates, as monetary policy was pointing in a different direction. Currently the market participants are pricing the first interest rate increase at the turn of 2017-2018.

AUD

“There has been a noticeable improvement in labour market conditions that was not anticipated at the time of the previous statement”

- Reserve Bank of Australia

The Reserve Bank of Australia voiced a cautious optimism on the domestic economy in its quarterly update on monetary policy in light of global financial turmoil. However, the central bank reiterated that despite local optimism, uncertainty about China’s growth prospects and the management of its economic slowdown remain a major global headwind. The RBA was confident that robust demand for jobs would persist despite slowdown in the mining sector and rising global market volatility. Furthermore, the bank admitted that the transition out of the mining boom was starting to take hold. The RBA made no significant changes to its prediction for GDP growth from its November statement, expecting the domestic economy to grow at an average pace of 2.5% in 2016 and 3% in 2017. However, the central bank predicted a persistent decline in the unemployment rate, whereas back in November the RBA said it expected the jobless rate to hold between 6.0%-6.25% over the next 12 months. Meanwhile, the official rate for December dropped to 5.8% after peaking at 6.3% during 2015.

In addition, the RBA repeated the easing bias included in the recent interest rate decision when the cash rate was left unchanged at all-time low of 2%. Australia’s inflation was seen to remain persistently low, providing the central bank with a greater scope for easier policy.

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