Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Overall, members agreed that emphasis needed to be placed on a steady course of monetary policy”

- European Central Bank

Manufacturing activity in the currency bloc continued to rise in May, according to flash data from Markit. The flash manufacturing PMI for the Euro zone increased to 52.3 points in May, compared to 52.0 in April. The region’s services sector also enjoyed a healthy expansion, with the flash services PMI reading booking 53.3. Also, the closely-watched composite PMI came in at 53.4, remaining firmly in green territory. In Germany, the Euro zone’s powerhouse, the manufacturing sector saw output continued to increase in May, albeit at a slower pace. May's preliminary PMI for Germany's manufacturing sector came in at 51.4, compared with April's final reading of 52.1, and below analysts expectations of 52. Meanwhile, activity in the country's service sector deteriorated in the reported month, the flash data showed. The preliminary services PMI fell to 52.9 points, below April's 54.0 points and failing to meet expectations of 53.9.

According to ECB monetary policy meeting accounts, officials agreed that the central bank’s asset buying programme worth 60 billion euros per month yielded intended results. However, full benefits would only be seen if governments proceeded with key reforms. Earlier in the week the ECB said it could step up its purchases of Euro zone government bonds ahead of the summer lull.

USD

“If demand was rolling over, we believe that this would show up in a softening of the price data, however, we have seen a pickup in the pace of resale prices to 10% on a year-over-year basis for single-family homes”

- John Ryding and Conrad DeQuadros, economists for RDQ Economics

The number of Americans applying for unemployment benefits increased slightly more than expected, but the underlying trend continued to point the labour market was tightening. Initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 274,000 in the week ended May 16, according to the Labor Department. Even though claims increased, they remained below 300,000, a threshold associated with a strengthening labour market, for an 11th consecutive week. The four-week moving average of claims, considered a better gauge of labour market trends as it strips out week-to-week volatility, dropped 5,500 last week to 266,250, marking the lowest level since April 2000.

Meanwhile, manufacturing activity across the US unexpectedly declined to the lowest level in 16 months in May. Yet the US factory activity is still some way ahead of the rest of the world. Markit’s manufacturing PMI dropped to 53.9 in the reported month, compared with 54.1 recorded in the preceding month. A separate report showed sales of previously owned homes dropped in April. Existing home sales fell 3.3% last month from March to a seasonally adjusted annual rate of 5.04 million. The National Association of Realtors also reported that the median price of an existing home climbed to $219,400 in April, up 8.9% from the prior year.

GBP

“Alongside the weather, it is evident that the conditions are in place for solid underlying retail sales growth”

- David Tinsley, economist with UBS

UK retail sales unexpectedly jumped in Aprils as warm weather boosted clothing demand the most in four years. The volume of sales including auto fuel soared 1.2% from March, the Office for National Statistics reported, after the 0.7% decline in the preceding month and compared with economists’ expectations for a 0.4% gain. Clothing and footwear sales were the biggest contributor to retail sales growth, jumping 5.2%, the biggest gain since April 2011. In the three months through April, retail sales increased 0.7% from the previous three month-period. They have now risen for 26 consecutive quarters, the longest streak of sustained growth since records began in 1996. Sales were also boosted by lower costs, driven mostly by cheaper oil and food in international markets. Average store prices declined for the 10th month in a row, with gasoline stations curing prices the most.

The UK economy expanded at a slower pace during the first quarter of this year, fuelling concerns about hurdles undermining the recovery such as weak productivity. Last week, the Bank of England revised downwards its growth forecast for 2015 to 2.4% from 2.9% it estimated in February. However, the central bank's policy makers say they believe GDP growth will accelerate during the second quarter and that disappointing earlier figures for the first quarter are likely to be a subject to revision. The second estimate of UK’s GDP is scheduled on May 28.

JPY

“Private consumption is firm reflecting steady improvements in job and income conditions. Housing investment is bottoming out and showing signs of a pick-up”

- Bank of Japan

The Bank of Japan refrained from adding more monetary stimulus and expressed more upbeat view on the world’s third largest economy, as a rebound in consumption boosted services sector’s sentiment to the highest level in a year. The central bank said it will continue to expand the monetary base at an annual pace of 80 trillion yen. The world's third-biggest economy grew 0.6% in the March quarter, preliminary GDP data showed, slightly above the forecast of a 0.4% expansion, and 0.2 percentage points bigger than December-quarter growth. The acceleration of growth was due to modest increases in private consumption, which makes up roughly 60% of Japan’s GDP. On an annualized basis, the economy grew 2.4% in the March quarter, picking up from 1.5% in the previous quarter. The central bank also revised up its assessment on household spending and housing investment, two components hurt hard by last year's sales tax hike, underscoring its belief that the economy emerged from doldrums. According to the BoJ, inflation is set to hit the 2% target in fiscal 2016, with tight labour-market conditions and the pressure created on wage growth helping to reach this target. The central bank's forecasts also assume a rise in global fuel prices from current levels. The BoJ bought itself some breathing space last month when it postponed the timing for hitting its inflation target. Yet, the decision also questions its credibility as it jarred with its commitment to reach the price target in "roughly two years" since stepping up stimulus in April 2013.

CNY

“Softer client demand, both at home and abroad, along with further job cuts indicate that the sector may find it difficult to expand, at least in the near-term, as companies tempered production plans in line with weaker demand conditions”

- Annabel Fiddes, an economist at Markit

China’s manufacturing activity declined for the third consecutive months in May as demand remained weak, fuelling expectations for more stimulus to support the growth in the world’s second biggest economy. HSBC's preliminary manufacturing PMI came in at 49.1 for May. Even though the measure was slightly better than 48.9 in April, it remained in contractionary territory. The preliminary PMI figure is based on 85% to 90% of total responses to HSBC's survey each month, and is released about one week before the final PMI reading.

The production sub-index fell for the first time this year, underlining worsening operating conditions. The output sub-index dropped to the lowest level in 13 months of 48.4, while the employment sub-index showed manufacturers cut jobs for the 19 straight months. The data is the latest in a string of downbeat fundamentals from China, and reinforces the view that policy makers will step up further stimulus to reach its 7% growth target for 2015. The People's Bank of China has cut interest rates three times since November, and lowered the reserve requirement ratios, the cash banks must hold as reserves, twice. The measures aim to reduce companies' borrowing costs and boost lending. China's economy, struggling with a property downturn, soft domestic demand and volatile exports, expanded at a six-year low annual rate of 7% in the first quarter.