Daily Forex Fundamental Overview

Fundamental Analysis

USD

“This is hinting at ongoing improvement in the labor market”

- Gennadiy Goldberg, a U.S. strategist at TD Securities

The number of Americans, who applied for unemployment benefits surprisingly dropped last week to the lowest level in seven weeks, adding to evidence of US economic resilience and improving labour market. Initial claims for state jobless benefits declined 9,000 to a seasonally adjusted 280,000 for the week ended December 20, the Labor Department said, recording the fourth consecutive week of drops in claims. The four-week moving average of claims, considered a better gauge of labour market trends as it strips out weekly volatility, slid 8,500 to 290,250 last week. Meanwhile, continuing claims soared 25,000 to 2.4 million in the week ended December 13. The four-week average of continuing claims surged 20,000 to 2.42 million.

The labour market is heading for the biggest advance in payrolls in 15 years, which has helped to push the unemployment rate to the lowest level in six years of 5.8%, down from a cyclical peak of 10%. A strengthening labour market should result in a faster economic growth, as broadening job gains are starting to underpin faster wage growth, which coupled with lower gasoline prices should boost consumer spending and help the economy withstand slowing global demand. The recent monthly gauge of consumer spending picked up in November, showing the fastest growth in three months.

GBP

“If wage increases are expected but productivity is performing well we can wait for longer [before tightening policy]; if those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up”

- Nemat Shafik, BoE Deputy Governor

Productivity in the British labour market rose in all major sectors. This should provide the Bank of England with some relief as an increased productivity coupled with rising wages should limit any significant upward inflationary pressures. UK labour output picked up by 0.6% in the three months through September, the biggest advance in more than three years, although it remains below pre-financial crisis levels, according to the Office for National Statistics. Labour market productivity in the UK, which is measured by output per hour, rose 0.3% compared with the same period in 2013, but it remains 2% below its level in 2008, which is likely to restrain real wage growth. Productivity improved in all of the main sectors of the UK economy in the September quarter, by 0.5% and 0.6% in the production and the service industries, respectively.

The relationship between wage growth and productivity is crucial to inflation forecasting at the BoE. Wage growth, just like production, has been very slow in the last six years. Total pay, which includes bonuses, increased 1.4% in quarter to October while regular pay, excluding bonuses, rose by 1.6%, both above the current level of consumer-price inflation. Low inflation keeps the BoE firmly dovish. For the majority of the Monetary Policy Committee, the outlook for inflation justifies keeping the current level of interest rates.

JPY

“While the economy is recovering, falling oil prices and slowing inflation will force the BOJ to ease policy further at some point next year”

- Hiroshi Watanabe, senior economist at SMBC Nikko Securities

Japan’s annualized core inflation cooled for a fourth consecutive month in November due to falling oil prices, underscoring challenges the Bank of Japan faces in reaching the 2% inflation goal. Factory production unexpectedly dropped, while real wages posted the sharpest decline in five years. The core consumer price index, which strips out volatile fresh food but includes oil products, climbed 2.7% in November from the previous year. Excluding the effects of a sales tax increase in April, core consumer inflation was 0.7%, falling from 0.9% in October and far below the BoJ’s 2% target. Industrial production declined 0.6%, however, manufacturers expect output to increase 3.2% in December and rise 5.7% in the beginning of 2015.

The BoJ Governor Haruhiko Kuroda said that recent drops in oil prices would be beneficial for the Japanese economy and would help to accelerate inflation in the long term. Kuroda underlined that while oil price declines weigh on overall prices in the short term, they will help to boost corporate profits and allow companies to increase wages. On top of that, minutes of the November meeting of the BoJ showed that board members urged the government to “steadily promote measures aimed at establishing a sustainable fiscal structure.”