Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"While the crisis in Ukraine remains the biggest risk to our optimistic outlook for euro-zone growth, the April PMIs show no evidence that the situation has had any major impact so far”

-Christian Schulz, senior economist at Berenberg Bank

Analysts are still trying to predict when Mario Draghi will pull the trigger; however, the recent reports can boost his confidence about the ongoing recovery in the bloc. Moreover, inflation, Draghi’s main headache, is projected to pick up in April. The single currency seems to be bulletproof for any shakes, as the most traded currency pair was still trading comfortably above 1.38 level. Another slew of positive data unveiled on Wednesday, as Markit said the PMI flash indicators of activity in the 18-nation economy’s business sector soared to the highest since May 2011. The headline flash composite PMI, which is considered to be a good gauge of overall economic growth, climbed to 54.0 this month following March’s final reading of 53.1 and beating analysts’ expectations for 53.0. The index moved further away from the 50 threshold, which separates growth from contraction. Separately, both manufacturing and services PMI surprised markets to the upside. Amid rising backlogs of work companies are projected to pick up the staff in order to expand capacity. It should provide additional boost to the economy, while the labour market has a potential to move lower from the record-high. The outlook is not so bright, keeping in mind Ukraine tensions and global uncertainty, surrounding the world’s first and second largest economies.

A release of weak French PMI pushed the Euro lower, while overall figures provided a boost to 1.3854.

USD

“While monetary-policy discussions naturally begin with a baseline outlook, the path of the economy is uncertain, and effective policy must respond to significant unexpected twists and turns the economy may take”

- Janet Yellen, Fed Chairwoman

Japan and Europe are focusing on the inflation rate, the U.K. made a shift towards the remaining slack, stressing out the productivity and the wage growth. The U.S. economy, however, is a massive and complex system, thus it is difficult to find some indicator that will be pointing to a stronger economy. One of the best source of overall economic data is the Beige Book, which is published by the Fed eight times per year. The central bank divides the whole economy into 12 districts. Each Fed Bank collects information through domestic banks, branch managers and via interview with key business contacts. The latest release of the Beige Book showed that activity in all districts except Cleveland and St. Louis increased. With spring outside, the birds are chirping again and consumers are expected to increase their spending, which accounts for around 70% of the overall economic activity. The economy is likely to continue building up steam, if not only the presence of two problems. The first is the quantitative easing programme and the growing uncertainty surrounding Obamacare. Perhaps, the central bank is concerned about the potential stock collapse in case it ceases the QE.

Nonetheless, since the Great Recession of 2008 the economy has been growing on a steady pace. The only concern was the inflation, but with the recent pick up in consumer prices, the Fed will proceed with tapering, while growth will accelerate, therefore, in a longer-term we can prepare for stronger Dollar.

GBP

“The recent widening of the current account deficit was an emerging downside risk to the recovery, it still seems unlikely that the MPC will raise interest rates within the next year or so”

- Capital Economics

The Bank of England is another institution, which offers no surprises for traders, as in order to avoid any turmoil in financial markets Mark Carney tries to stick to his adjusted forward guidance. Some of the members, however, still do not completely understand the term “slack” and members are divided on when and how to revise the monetary policy.

Minutes from the April’s 9 meeting showed that domestic economy is building up steam; however, policymakers are divided about the assessment of the amount of slack in the economy and the medium-term economic outlook. The central bank expects a growth of 1% in the first quarter, accelerating from a 0.9% expansion recorded in the preceding quarter. Regarding the second quarter, however, the bank expects a slight cool down. One of the worrying signs remains a constantly increasing current account deficit, which now equals 5.2% of the overall economic output. Members also agreed that inflation will pick up soon; however, the probability the CPI will stand at 2.5% over the next 18-24 months, decreased to 50%. There is also a growing uncertainty surrounding the remaining slack in the labour markets and other sectors. The latest unemployment figures are pointing at the ongoing and broadening recovery as wage growth met inflation. The cable was fluctuating around 1.6819 after the release of the minutes, almost unchanged from the level recorded before the report.

JPY

“If we reach our target and prices are stable, we have no intention of moving away from our goal and implementing policy to reduce debt servicing costs”

- Haruhiko Kuroda, BoJ Governor

What if? Such a question arises too often when it comes to Japan. The world’s third largest economy is supposed to reach the 2% inflation target next year, while exports should pick up on the back of weaker Yen. Analysts and some of the BoJ members, however, are constantly expressing their doubts about the current level of stimulus package, as latest data were not really convincing, while April’s sales tax hike will become a massive drag on the economy.

Haruhiko Kuroda, however, is still confident about the strength of Japanese economy. This week he claimed that the Bank of Japan will not make huge bond purchases just to push the nation’s government debt lower, after the economy reaches its goal of stable 2% inflation. A launch of the unprecedented stimulus programme in April 2013 has helped to suppress yields on the 10-year government bonds to its lowest level in the world even despite the fact inflation accelerated at the fastest pace since 2008. Both Kuroda and Abe now face a challenge to avoid any abrupt yield rises in case prices continue rising as planned.

Surprisingly, Kuroda claimed that the CPI has a potential to exceed the official target in the fiscal year ended in March. His Deputy, Hiroshi Nakaso also added to the optimism, stressing the economy will withstand the pain from the latest tax hike.

AUD

"The Reserve Bank can comfortably keep interest rates at exceptionally low levels over the near term. Whichever way you cut it, inflation is well and truly in check.”

-Savanth Sebastian, an economist at a unit of Commonwealth Bank of Australia

We should definitely forget about the rate hike from the RBA. Despite neutral or even slightly hawkish bias from Australian central bank in the recent weeks, the latest inflation report is diminishing any hopes for a tightening of the monetary policy any time soon.

The Australian Bureau of Statistics said that the cost of living in Australia climbed only 0.6% in the first quarter of this year, slowing from 0.8% three months earlier and missing analysts’ expectations for a no change. The main upside pressure came from tobacco and automotive fuel prices, which advanced 6.7% and 4.1%, respectively. In contrast, these rises were offset by a 4.3% drop in furniture and a 3.3% decline in maintenance and repair of motor vehicles. On a annual basis CPI posted a 2.9% gain, in the March quarter, accelerating from the growth of 2.7% seen in February. Furthermore, a core measure, which excludes the most volatile prices, advanced only 0.5% from the previous quarter, disappointing markets. These figures should damp speculations that heating housing market and falling unemployment will spur the RBA to raise the key refinancing rate from the current, record-low level of 2.5%. Moreover, they provides a scope for the RBA to extend a period of stable interest rates.

Following the report the Aussie plunged 0.5% versus the American counterpart, with the pair reaching 0.9325.