Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"We have already done a lot to lift the debt burden for Greece over the last couple of years, in terms of interest, maturity and the length of the loans”

- Minister Jeroen Dijsselbloem, Eurogroup chief and Dutch Finance

While Greece’s Syriza party seeks to keep its election promise to replace the bailout plan, which expires on February 28, with a new agreement that eases austerity and relieves Greece’s debt burden, European officials signal that debt reduction would be against the Euro zone rules and would set a precedent for other recession-hit countries. However, Syriza believes that it is unrealistic for Greece to repay its massive debt in full. According to the Kiel Institute for the World Economy, Syriza’s pledge to seek debt write-off would cost German taxpayers at least 20 billion euros, while the worst-case scenario suggests a loss of as much as 80 billion euros, if a cut of at least a half of Greece’s public debt is approved. Yet, Eurogroup members, Euro zone finance ministers are ready to support Greece by providing more time to repay its debt. Meanwhile, the German government insisted that Greece's new leadership should deploy measures to guarantee an ongoing economic recovery in the country. Wolfgang Schaeuble, German Finance Minister, also said that the Euro bloc is willing to continue the bailout programme for Greece. In the meantime, the effectiveness of the ECB’s QE is being questioned. Moritz Kraemer, the Standard and Poor’s Head of EMEA Sovereign Ratings, said that the recently announced stimulus programme has laid the groundwork for a revival of the Euro zone’s economy, but the bloc’s member states still need to proceed with structural reforms.

USD

“Despite the shockingly negative monthly report, the pull-back in investment in Q4 comes on the heels of a double-digit expansion in both Q2 and Q3, and should be taken with some caution”

- Derek Lindsay, BNP Paribas

Demand for big-ticked manufactured goods unexpectedly plunged in December, a sign US businesses are cautious to spend even in light of the strong economic recovery. Durable goods orders fell a seasonally adjusted 3.4% in December from the previous month, against economists’ expectations for a 0.6% gain, while core capex, which excludes defence and transportation orders, dropped 0.6% in the reported month. However, broader trends point to a modest increase in demand for durable goods, with orders picking up 6.2% in 2014 compared with a year earlier.

A separate report from Markit offset the negative effect from durable goods orders data, as it showed the US services sector started the year on a slightly firmer footing. The services PMI rose to 54.0 in January, up from the previous month’s 53.3, which was the weakest reading in ten month. Activity growth in the sector has slowed since the gauge reached a peak of 61 in June, though January's reading is still higher than 50, the threshold that separates expansion from contraction. Meanwhile, new home sales rose more than expected, as purchases of houses soared 11.6% to an annual rate of 481,000 in December, the highest level in more than six years. The data overshot market expectations for a 450,000 gain and followed a revised 431,000 in the preceding month, the Department of Commerce reported.

GBP

“The dominant services sector remains buoyant while the contraction has taken place in industries like construction, mining and energy supply, which can be erratic”

- Joe Grice, chief economist at the ONS

While the UK economy recorded the fastest annual growth rate since the financial crisis of 2007, the economic recovery lost some steam in the final quarter of 2014. According to the Office for National Statistics, the UK economic output slowed to 0.5% in the three months through December, down from 0.7% in the previous quarter and against the City’s forecast of a 0.6% growth rate. The final quarter’s GDP was affected by weaker production of oil and gas in the North Sea, which translated into an unexpected fall in overall industrial output. GDP advanced 2.7% compared with the fourth quarter of 2013, while economic output in 2014 as a whole was up 2.6% on 2013. Services sector continues to be the main catalyst of headline GDP growth, contributing 0.62 percentage points of growth on the quarter, whereas construction's decline deducted 0.11 percentage points of the total. The International Monetary Fund expects the UK economy to grow 2.7% this year, which would be the fastest in the Group of Seven after the US.

Prime Minister David Cameron is relying on the recovery and surging employment to help him retain power after the general election, which take place on May 7, with polls suggesting neither his Conservative Party nor the Labour opposition is set for a parliamentary majority. The economy is now 7.8% bigger than it was in the second quarter of 2010, when Britons went to polls last time.

AUD

“Falls in commodity prices underlie substantial declines in mining confidence”

- Alan Oster, chief economist at NAB

Australian business conditions deteriorated in December, while sentiment remained weak, increasing pressure on the Reserve Bank of Australia to cut interest rates in the coming months. According to the National Australia Bank, Business Confidence Index climbed to 2 in December, up from 1 in the preceding month due to lower oil prices, whereas NAB Business Conditions Index slipped from 5 to 4, falling for a second consecutive month. All three sub-indexes of the conditions index, namely profits, sales and employment, fell in December. Despite ultra low interest rates, record house prices, falling fuel costs and a weaker Australian Dollar last year, business continues to struggle with weak demand due to a decline in mining investment and commodity prices after a decade-long boom.

Australia has faced much weaker growth levels over the last couple of years, especially as the commodity-exporting economy has been substantially hurt by the recent fall in global commodity prices, slower growth in its top export destination China, and a relatively-strong exchange rate. Weaker economic settings have forced the RBA to deploy the most accommodative policy settings ever seen in the country, however many experts are projecting the central bank to reduce interest rates even further this year. The NAB expects that the RBA will have to slash rates twice this year in order to prop up the nation’s economy, counter cooling inflation and increase in unemployment rate to 6.6%.