Daily Forex Fundamental Overview

Fundamental Analysis

Highlights of the week ended March 20

Euro zone

Mario Draghi testified on the European Central Bank’s monetary policy before the European Parliament’s Economic and Monetary Affairs Committee in Brussels on March 23. The ECB President gave a more positive assessment for the Euro area’s economy as growth is gaining momentum helped by the QE programme started March 9. He stressed that one of the key factors of economic recovery is ensuring that inflation does not remain too low for a long period of time. Meanwhile, the Standard & Poor’s international ratings agency has increased its outlook for Portugal’s sovereign credit ratings, up from “neutral” to the “positive” one. The rating itself, however, remained unchanged at BB/B level. In its review, one of the leading rating agencies in the world along with Moody’s and Fitch, pointed on a continuous improvement in country’s finances and economic progress during recent times.

US

Despite negative expectations, consumer prices in the world’s most powerful economy were published better than initially projected in February of this year. Moreover, the annual CPI exited the negative territory it fell into last month, while showing a zero growth. Moreover, inflation was at 0.2% on month-to-month basis and in line with estimates. Meanwhile, St. Louis Fed President James Bullard announced that the Federal Reserve should raise interest rates as soon as possible, stressing that low rates are not appropriate for growing US economy any more. Speaking at City Week conference in London, he also gave a prediction that US economy will gain more momentum in the second quarter of this year after a slow-down in January-March, helped by lower prices of oil and a subsequent increase in consumer spending.

UK

Just two days after UK Chancellor of Exchequer George Osborne presented his Budget for the financial year 2015, country’s public finances showed a considerable improvement. On Thursday, the Office for National Statistics published data on Britain’s public sector net borrowing in February. Net borrowing, which includes all government’s tax receipts and expenses but excludes data from public-sector banks, stayed at 6.9 billion pounds last month, down more than 30% from 10.4 billion pounds during the same month a year ago. In the meantime, for the first time since data collection on UK inflation began around three decades ago, the main gauge for measuring consumer prices in this country fell as low as zero in February of this year. At the same time, the Bank of England Governor Mark Carney predicts the CPI reading will most likely fall below zero threshold in coming months, even though the change is mainly driven by temporary factors, such as crude oil prices.

EUR

“There are clear signs that euro zone consumers are currently taking advantage of deflation or very low inflation to lift their purchasing.”

- IHS Global Insight

According to the report of the Federal Statistical Office of Germany, Destatis, import prices in the Euro zone’s biggest economy have jumped noticeably in February 2015, calculating on month-to-month basis. The indicator, which measures prices of imported goods purchased on a domestic market, gained 1.4% last month from the previous one. It followed four consecutive months of losses for import prices and particularly a 0.8% drop in January. Economists, from their side, expected German import prices to advance just 0.5% in February; therefore, the result has considerably exceeded predictions. However, on the annual basis the import price index is still recording negative changes, which amounted to 3% in the previous month, compared with February 2014, even though it still means a major improvement from a 4.4% plunge in January of this year.

At the same time, retail sales in Italy, the third largest economy of the monetary bloc, rose slightly in January by 0.1% month-on-month. The result was in line with estimates and came after an upwardly revised 0.1% decrease in December. Contributing a large share to the economy, retail sales are playing important role in Italy’s recovery which has been weak since financial crisis began in 2008. Last year, Italian GDP shrank 0.5%, and completely no growth was registered even during last quarter of the year.

USD

“The consumer is still going to hold up. As we look toward the middle of the year, you have a consumer that continues to see aggregate income growth.”

- RBC Capital Markets

American economy rose slightly less when compared with analysts’ expectations in the last quarter of the previous year, mostly led by upbeat consumer spending which was the highest in eight years. GDP added 2.2% on the annual basis, according to the final reading published on Friday. Economists called for a 2.4% average gain after the preliminary data also showed a 2.2% increase. However, experts suggest the economy could grow better, but several negative factors weighed on exports and consumer spending during October-December period. Among them, US Dollar has been in a constant up-trend since the middle of last year, thus making American exports less attractive over the time, while imports has seen an opportunity to increase. As a result, trade balance of the country widened in Q4; however, it was partly offset by smaller energy imports as US oil production has been growing. In the meantime, consumer confidence declined marginally amid temporary worse than forecasted weather conditions this winter.

Nevertheless, analysts assume the US economy should regain momentum in the coming quarters. Jobs’ growth remains strong and fewer Americans are applying for jobless benefits. Therefore, despite some weakness in foreign trade, economic expansion will most probably be driven both by domestic demand and climbing investment in 2015.

GBP

“Economic conditions have remained supportive, with labour market conditions continuing to improve and mortgage interest rates close to all-time lows.”

- Nationwide

Property prices in the United Kingdom have increased this month, even though growth remained subdued after strong gains a few years ago. According to Nationwide, the agency which is publishing housing price data every month, the average price of a house in the country edged up just 0.1% in March on the annual basis, or somewhat lower than a 0.2% gain forecasted by the majority of analysts. Moreover, on the annual basis a downward change was even steeper, with prices going up 5.1%, down from 5.7% seen in February. Therefore, prices’ growth has been decreasing for the seventh consecutive month. In 2012 and 2013 they have registered a strong climb, and the current situation is usually explained as a calm-down with the HPI Index returning to less volatile and stable levels. At the moment prices are staying around 2% above the pre-crisis peak.

In the meantime, Nationwide’s experts are pointing on still rather broad differences in price tendencies across Britain. The strongest rate of annual advance was posted by the South of England and London, two regions where economic situation seems to be more optimistic, compared with other parts of the country. North West England, Wales and Scotland have all seen prices cooling down, with Wales alone providing a drop of 0.5% in Q1 on the yearly basis. Moreover, prices in these three regions remain below the pre-recession peak level reached in 2007.