Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“If you get people in a room and if you disclose something that could be perceived to be market-moving to a reasonably select group, then you’ve got to be exceptionally careful”

- Philip Lawlor, a partner at London-based Smith & Williamson Investment

After announcing an acceleration of money printing to boost bond buying before liquidity dries up during Europe’s summer vacation period in July and August, the European Central Bank slowed its weekly pace of purchases. The central bank bought 11.819 billion euros worth of assets in the week ended May 22, marking the smallest increase in three weeks. Under the quantitative easing programme, which began in early March, the ECB aims to purchase 60 billion euros a month of bonds, asset-backed securities and covered bonds. The scheme is intended to last till September 2016, or beyond to ensure a sustained adjustment in the inflation path back towards the ECB's 2% target.

Meanwhile, another scandal broke out after one of ECB officials provided high-impact market information to a private audience including major hedge funds before it was made public. ECB executive board member Benoît Coeuré shared fresh details of the central bank's bond-buying stimulus programme that became available to broader audience the next day. Last Monday, Coeuré gave new details of the ECB's bond-purchase plans in a speech that took place following an all-day conference. The ECB said it planned to publish Coeuré's speech at the same time as he gave it, but due to an error it was not released until the following morning. When the speech went public, the Euro tumbled and stocks and bonds soared.

USD

“Consumer confidence improved modestly in May, after declining sharply in April”

- Lynn Franco, director of economic indicators at Conference Board

US core durable goods orders rose more than expected in April, increasing 0.5%, surpassing economists’ median forecast for a 0.3% gain, and compared with an upwardly revised March figure of 0.6%. Meanwhile, total durable goods orders pulled down 0.5% in April, in line with expectation.

US services sector activity slowed for the third consecutive month in May, with the headline indicator booking the lowest level since January. According to Markit, its preliminary services PMI declined to 56.4 in May, compared with the final reading of 57.4 in the previous month. The services sector is an important part of the US economy, as services account for more than 79% of the nation's private-sector GDP. Service jobs make up more than 80% of America's private-sector employment. The Markit data suggest annual GDP growth could accelerate to around 3% in the second quarter, while the economy adds around 200,000 jobs a month. Meanwhile, the mood among Americans slightly improved in May, with the headline measure climbing closer to its recent multi-year peak. The Conference Board’s index of consumer confidence rose to 95.4 in May from a revised reading of 94.3 the month before. Data suggest that US consumers improved their short-term outlook for both employment and income prospects.

GBP

“Low inflation, which we expect to remain below 1% for the rest of the year, has given household incomes a much-needed boost and greater spending power”

- Rain Newton-Smith, the CBI's director of economics

UK retail sales growth soared in May, while the expectations for the next month's sales hit the highest level in almost 27 years. The Confederation of British Industry's retail sales balance surged to +51 in the current month, far overshooting economists' expectations for +17, and compared with +12 in April. The indicator of expected sales for June jumped to +58, the highest level since September 1988, and up from +40 in May. The survey showed the volume of orders expected to be placed with suppliers next month increased to its highest since September 1996. According to the latest official data, UK retail sales, both including and excluding fuel, rose more than expected in the beginning of the second quarter as sales in clothing and footwear reached the highest level in four years.

Quarterly data also published by the CBI indicated that retailers' overall assessment of the business situation improved to +20, the highest mark since last August, up from +11 in February. CBI also expected British inflation to remain below 1.0% for the rest of the year. The official consumer price index dropped by 0.1% in the year to April 2015, for the first time since 1960. Yet, a steady growth in the retail sector suggests consumers in the UK do not tend to postpone major purchases due to expectations that prices will continue to decline further in the future – a phenomenon called a deflationary spiral.

JPY

“With regard to the baseline scenario for prices, many members expressed the view that there was considerable uncertainty, mainly in developments in medium- to long-term inflation expectations, and risks on the price front were skewed to the downside”

- BoJ meeting minutes

While the Bank of Japan’s policy makers believed private consumption would remain resilient as incomes are increasing, they expressed concerns about Japan’s inflation. Board members said that risks to consumer prices are tilted to the downside amid uncertainty about long-term inflation expectations, consumer spending as well as the output gap, minutes of BoJ’s April 30 policy gathering indicated. If consumer prices slid to zero, it would affect inflation expectations. In March, data showed the consumer inflation rate climbed 0.2%, excluding the impact of sales tax increase last year. As a result, the BoJ pushed back the timeline for achieving its inflation target to fiscal 2016. Yet, a few members remained sceptical about the new timeframe, saying that consumer prices would not reach the central bank's price goal in fiscal 2017, the minutes showed. Previously, the BoJ had expected that it could achieve its target sometime around fiscal 2015.

In addition to that, central bank’s decision makers agreed that the risks to Japan’s growth are balanced, but they warned that growth could slow temporarily due to a nationwide sales tax hike in the beginning of fiscal 2017. Official data showed the world’s third largest economy expanded an annualized 2.4% in the first quarter, better than expected and following the 1.5% annualized growth in the final quarter of 2014.