Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"Today’s ZEW index sends two messages, which perfectly characterize the current state of the German economy. The economy had an excellent start to the new year, gaining new momentum.”

-Carsten Brzeski, an ING chief economist

After a slew of disappointing data from Germany during the last several weeks, another report suggested that we can see more weakness in the foreseeable future. The single currency was trading in a narrow range moving 0.14% lower after the release of the German ZEW indicator.

A report from the ZEW Centre for European Economic Research showed that a gauge of investor sentiment in Europe’s largest economy eased to 43.2 this month from 46.6 a month earlier. Analysts had expected a figure of 45.0, and despite the disappointment, the index still remained highly above zero mark that separates optimism from pessimism. With the indicator at the lowest since August last year, the outlook for the next six months looks not so promising now.

After the remarkable start of the year, the German economy is now starting to feel some headwinds. A drop in exports can be interpreted as a worrying sign for companies this year. Furthermore, strong Euro is making products less competitive globally. The EUR/USD pair almost 7% higher than a year ago, while the index that measures Euro’s performance gained only 3.5%. Ukraine tensions, uncertainties surrounding the Chinese economy and slowing emerging markets are all posing a serious threat to Europe’s powerhouse.

USD

“We are sure the weather is to blame but what happens when pent-up demand (from a frosty east coast emerging from its hibernation) bumps up against a drought-stricken west coast unable to plant to meet that demand?”

- Tyler Durden, Zero Hedge

Finally, there is a pickup in the inflation rate. Weak inflationary pressure has been one of the main concerns for the Fed during the last months. In case Janet Yellen wants to start raising interest rates, she will need a room for a manoeuvre; however, a persistent weakness in consumer prices is suggesting the central bank will keep the stimulus for a longer time.

On Tuesday, Janet Yellen got a relief from a report from the Bureau of Labor Statistics that showed price growth in the world’s largest economy continued to remain subdued, though surprising markets to the upside. The core measure of inflation stood at 1.7% on an annual basis in March, accelerating from 1.6% a month earlier and outpacing expectations for no change. On a monthly basis, consumer prices ticked up 0.2%, outpacing analysts’ predictions for a 0.1% increase. The broader measure also improved over the same period. The Fed considers the core measure as the headline indicator, as it excludes food and energy prices, which are removed because of their volatility, providing a more accurate view of tangible price growth.

The Fed decided to abandon the unemployment threshold, however, some of the FOMC members suggested linking the guidance to the inflation rate, a measure that will add a quantitative element in the Federal Reserve’s statement.

GBP

“Clearly below-target inflation facilitates the Bank of England keeping interest rates down at 0.50% where we believe they are highly likely to stay through 2014 and during the early months of 2015, despite the economy’s improved growth and markedly reduced unemployment”

- Howard Archer, IHS Global Insight's

The Sterling remained in the negative territory on Tuesday, after the disappointing CPI figures. The cable refreshed this week’s low, hitting 1.6663 immediately after the release of the data, however, later, bounced back above daily pivot at 1.6723.

The ONS said consumer prices advanced only 1.6% in March, decelerating from 1.7% a month earlier, hitting the lowest since October 2009 and posting the third consecutive monthly drop in inflation. Moreover, one of the key indicators of economic health moved further away from the target of 2%. The main downside pressure came from record-low petrol price, a drop in energy prices and a decline in the cost of furniture as well as household goods. The only contribution to growth was made by restaurants and hotels, where prices picked up 0.5%. The core measure, which excludes the most volatile prices, also slowed in line with forecasts to 1.6% from 1.7% a month earlier. The main gauge of inflation stayed below the official target for three months, helping to ease the pressure on Mark Carney, who pledged to keep interest rates at a record-low of 0.5%. Additionally, slowing inflation is easing the squeeze on the nation’s consumers, while also helping the pace of growth in wages to outpace inflationary pressure. A strong rebound in wages and salaries will eliminate the remaining slack, as inflation is expected to remain below the 2%-mark for the foreseeable future.

JPY

“We are on track to achieve our 2 percent price-stability target, but only halfway”

- Haruhiko Kuroda, BoJ Governor

On Tuesday Japanese Prime Minister Shinzo Abe met central bank’s governor during the lunch to discuss the current economic conditions in a calm manner, without adding any pressure. This event can be omitted and not mentioned in the fundamental analysis. However, Kuroda’s surprising speech on April 8 shocked markets. He rejected an imminent additional easing of the monetary policy. Nevertheless, during the G20 meeting he claimed the central bank is willing to act in case anything threatens the recovery or can weaken the inflationary pressure. It seems that Kuroda is mixed in his own comments, while voices of those warning against the underestimating the potential effects of the VAT increase are getting louder. The Yen is not moving lower due to its safe-haven appeal, which is boosted by the Ukrainian crisis. The downward pressure on USD/JPY, however, is running out of steam and soon we might see another steady rally.

During this week’s lunch Kuroda assured Abe that the central bank will not hesitate to adjust its monetary policy if needed. They both need to steer the land of the rising sun through a slump in domestic consumption that is projected after the April tax hike. While Shinzo Abe made no additional requests for more monetary stimulus it is getting clear that the bank will have to act as soon as they are able to assess the potential damage caused by their own actions earlier this month.

NZD

"Prices are gradually accelerating across a broad range of categories, as the economy heads towards full capacity and the inflation-dampening effect of the New Zealand dollar fades”

-Michael Gordon, Westpac's senior economist

The New Zealand currency lost more than a half per cent against the U.S. Dollar on Wednesday as inflation report came weaker than expected. The NZD/USD pair declined 0.53% to 0.8598, moving closer to a strong support at 0.8578.

A report from the Statistics New Zealand was the first set of disappointing data for a long time. The agency said the cost of living in New Zealand rose 1.5% in the first quarter, slowing down from 1.6% three months earlier and missing analysts’ expectations for a 1.7% growth. At the same time, dairy prices declined for a fifth straight auction, extending their losses to 21.9%. Around a half of the quarterly gain came from the housing market, where household utility costs climbed 3.3%. The main downside pressure, however, came from typically-imported goods like computers or audio-visual equipment, that suffered from the high exchange rate. The kiwi soared more than 6% against its U.S. counterpart amid RBNZ’s tightening of its monetary policy.

With inflation hovering safely within the official target band of 1-3%, it is unlikely that the central bank will veer away from its pledge to continue raising interest rates. Therefore, it is widely expected that the RBNZ will raise the OCR by additional 25 basis points during its meeting next week.