Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"It is also worth noting that food prices fell from 1.0% year-on-year to -0.5% year-on-year, cutting 10 basis points from the headline inflation, while the energy component accelerated marginally from -2.3% year-on-year to -2.1% year-on-year”

-Analysts from Societe Generale

It seems that investors neither paid attention to Fed’s pledge to start raising interest rates next year nor they took seriously Mario Draghi’s speech in Washington DC. Furthermore, unrevised inflation and disappointing current account were not able to push the single currency lower. The most traded currency pair was still trading comfortably above the 1.38-mark.

A shocking drop in the inflation rate in March was confirmed on Wednesday, keeping pressure on Mario Draghi to intervene until prices do not rebound. The annual inflation rate in the 18-nation’s bloc stood at 0.5% last month, falling from 0.7% a month earlier. The largest increases were logged in prices of tobacco, restaurants and bars. Moreover, the Eurostat reported on a stark disparity among members, with Greece posting a 1.5% drop, Cyprus 0.9%, while Austria and Malta both registered 1.4% price increases. Consumer prices have been in danger zone below 1% for the last six straight months, fuelling speculations the European Central Bank will have to pull the trigger. Draghi made it clear they are ready to deploy unconventional measures in order to assure that inflation will not go any lower. Moreover, the strength of the shared currency makes imports cheaper and pushed the prices Europeans pay for goods and services lower.

USD

“With inflation running at around 1 percent, at this point I think the risk is greater that we should be worried about inflation undershooting our goal and getting inflation back up to 2 percent"

- Janet Yellen, Fed Chairwoman

Even though a number of economic indicators points at further strengthening of the U.S. economy in the months to come, the head of the Federal Reserve, Janet Yellen, said on Wednesday that she saw interest rates staying very low until the recovery is on a firmer footing and the nation’s economy fully employs available workforce and other resources. She also highlighted that persistently low inflation is a more serious threat to the U.S. economy than rising prices, hinting that the Fed would be providing monetary stimulus in the foreseeable future.

In her second speech as the Fed head, Yellen was particularly cautious not to forecast when interest rates would rise from the current ultra-low level. Instead, she stressed that the decision would depend on the health of the labour market and how fast inflation moves towards the Fed’s 2% goal. Yellen emphasized that even though the headline jobless rate has been falling, reaching 6.7% in March, other measures of the job market’s health, including the number of people forced to apply for part-time work and the proportion of the population that has dropped out of the work force, all point to weakness. Following Yellen’s speech the U.S. Dollar weakened versus most of its 16 major counterparts, losing 0.2% to $1.3840 per Euro and 0.3% to 101.94 yen.

GBP

“These figures - rising employment and falling unemployment and inactivity - continue the strong trend in the labour market that has been seen in recent months. Self-employment has again been a prominent growth area.”

- Joe Grice, chief economic adviser at the ONS

It finally happened. The unemployment rate moved below the Bank of England earlier implemented threshold, while wage growth met inflation. The Sterling was boosted by the upbeat data from the U.K. labour market on Wednesday, with the cable soaring 0.50% to 1.6814, moving above the daily R2 and a strong psychological level of 1.68. Moreover, taking into consideration ‘buy’ signals from technical indicators, pending orders that are placed to buy the pair and strong fundamentals from the U.K, the pair is projected to continue moving higher.

A highly-anticipated report from the ONS showed the jobless rate measures by the International Labour Organization methods plunged to 6.9% in the first quarter from 7.2% three months earlier, moving below 7% for the first time since April 2009. The number of people claiming for jobless benefits hit the lowest since November 2008, while the claimant count rate fell for the 17th straight month. Employment in the U.K. now stands at a record 30.389 million, bolstered by the number of people who are self-employed. The improvement was expected, while what is more important is the 1.7% increase in the total pay growth. The last time the indicators was higher was in June 2013. Regular pay soared 1.4%. Luckily for the BoE, the inflation continued falling in March, and a steady rise in wages will help to eliminate the remaining slack sooner than expected.

JPY

“It's true (the tankan survey published earlier this month) showed a wide range of companies, especially among automakers and retailers, holding a more cautious view about the economic outlook”

- Haruhiko Kuroda, BoJ Governor

Haruhiko Kuroda affirmed his upbeat view on the world’s third largest economy this week, even despite a recent appreciation in the Yen and a slump in Japanese stocks, stressing that growth will pick up around mid-year as the string of the latest tax hike will begin to fade. Kuroda added that price rises will broaden amid the ongoing economic recovery, reiterating his view the economy will reach the 2% inflation in about a year’s time.

Other central bank’s members, however, are less confident about future prospects. Moreover, the Nikkei newspaper reported that the government will cut its economic growth outlook for the first time in more than a year this week amid concerns about the blow to consumption caused by the tax increase. The Cabinet Office will stick to the phrase “economy is recovering at a moderate pace”, however, they will warn about the weakness in consumer sentiment and slower spending, following a 3% jump in the levy.

A first downgrade in the assessment since November 2012 can be interpreted as a first step on the road toward further easing. All crosses with the Japanese Yen are projected to move higher on the report, as any cautiousness in the assessment or dovish comments will provoke a massive sell-off of the Japanese currency.

CAD

"While the recent run of firmer-than-expected inflation numbers suggest that the downside risks to inflation – a key underpinning to the BoC’s more dovish stance – are beginning to recede”

-David Rosenberg, chief economist of Gluskin Sheff + Associates

The loonie has been steadily appreciating since March, adding pressure on the land of the maple leaf. The nation’s policymakers are trying to talk down the currency without introducing any bold measures.

During its April’s policy meeting, the Bank of Canada left its key refinancing rate unchanged at 1%, where it has been since September 2010, meeting analysts’ expectations. The bank affirmed its neutral bias on the direction of its next interest-rate move, as policymakers look for more statistics, while companies are still reluctant to increase investment. The central bank believes the inflation rate will stay close to the target range, due to the fact energy bills will begin to decline. With the inflation of 2% on the track, the economy will have to reach its full capacity, which is projected to happen in 2016. Once the economy reaches the full capacity, the Bank of Canada believes the growth will stand at 2%, as the economy will grow at its speed limit. The short-term growth outlook stands at 1.5% for the first quarter of this year.

A weaker loonie and the ongoing economic recovery in the world's largest economy are likely to help exporters, boosting the demand for Canadian goods. Nevertheless, the USD/CAD pair still has a potential to appreciate, easing pressure on the Bank of Canada further.