Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Spain and Italy appear to be staging strong recoveries, benefiting in particular from impressive export performances”

- Chris Williamson, Markit's chief economist

For the first time this year, consumer prices across the 19-country currency bloc edged higher, easing fears that the Euro zone is set for a prolonged Japan-style era of deflation. According to a report from Eurostat, consumer prices across the Euro bloc climbed 0.3% last month from the year before, with energy prices becoming less of a drag. More surprisingly, core inflation, which excludes volatile components such as energy, food, alcohol and tobacco soared to 0.9%, the fastest rate since August 2014. In January, when the European Central Bank announced its quantitative easing programme, Euro zone consumer inflation stood at minus 0.6%. Now, less than three months since bond purchases have begun, inflation has rebounded quickly to 0.3%. Nevertheless, inflation remains far below the ECB’s target of below, but close to 2%.

Meanwhile, the number of unemployed in Germany dropped by 6,000 in May, while the unemployment rate remained at the lowest level in 25 years for the third consecutive month. The unemployment rate remained at 6.4% in seasonally adjusted terms, a record low where the gauge dropped to in March. At the same time, the number of unemployed in Spain fell by 118,000 in May, measured on a monthly basis, after a considerable decrease of almost 119,000 in the preceding month. Unhealthy high unemployment in Spain remains a hot political issue ahead of parliamentary elections at the end of this year.

USD

“Some of the pessimism about the factory sector is overdone”

- Michelle Girard, chief U.S. economist at RBS Securities

US factory orders plunged in April, adding to signs that manufacturers are struggling amid a stronger Greenback and cheaper oil. Orders dropped 0.4% in April, marking the eighth decrease in nine months, the Commerce Department reported. The key category that assesses business investment plans, non-military capital goods excluding aircraft, slid 0.3%. Orders for electronic products fell 4%, while demand in the volatile aircraft category tailed off steeply. Manufacturers have struggled in recent months due to global economic headwinds. The stronger Dollar has increased the cost of US-produced goods overseas, lowering sales in Europe and Asia. At the same time, cheaper oil prices have curbed demand from energy firms for pipelines and equipment. The spring rebound from a harsh winter that forced to shut down assembly lines has yet to blossom. Orders for durable goods declined 1% in April. Demand for non-durable goods, which include food and clothing, rose just 0.2%.

The ISM manufacturing index rose to 52.8 last month from 51.5 in April, the data showed earlier this week. The economy will likely rely on greater manufacturing sector output to recover after a soft start to 2015. During the first three months of the year, the economy shrank at an annual rate of 0.7%. Economists expect annualized growth to rebound to roughly 2% in the second quarter of this year.

GBP

“Additionally, construction firms experienced an upturn in new business growth from April's near two-year low and job creation was the fastest recorded so far in 2015”

- Tim Moore, Markit

UK construction sector recovered in May from the lowest level in almost two years in April. The Markit/CIPS UK construction PMI bounced back to 55.9 in the reported month from April's 22-month low of 54.2. Optimism among UK construction companies rose to a nine-year peak last month after Prime Minister David Cameron unexpectedly won the general election with an outright majority, and growth in the sector rebounded from a slowdown. The PMI also showed construction firms employed staff at the fastest pace in five months during May. However, Markit said it was unclear if the uptick in confidence would translate into increased output volumes, highlighting that all parts of the construction industry have lost traction over the past 12 months, even after taking May's PMI rise into account.

Meanwhile, according to New Economics Foundation, British think-tank, the UK's financial system is the most vulnerable among the G-7 economies, and only structural reforms can help protect it from another financial disaster. The report reveals that the regulatory changes implemented since the 2008 banking crisis have been insufficient and a threat of upheaval still persists. Among the main reforms that the NEF recommends are a full separation of high street banks from investment banks, and more competition in the banking sector.

AUD

“It’s a mixed result, with a good headline masking some disappointing details”

- Keiran Davies, Barclays Plc’s chief economist

Australia’s gross domestic product grew more than expected in the first quarter, as a pick-up in mining export volumes, household spending and retail stock managed to offset sluggish investment. The Australian economy expanded at a robust 0.9% pace in the three months through March, justifying the Reserve Bank of Australia’s decision to keep interest rates on hold. The quarterly growth figure compares with 0.5% in the last quarter of 2014. Economists, however, had expected a 0.7% gain. Measured on an annual basis, growth came in at 2.3%, compared with 2.5% in the December quarter. The economy was boosted by a 5% increase in exports in the first quarter even as commodity prices declined. Final consumption expenditure contributed 0.4 percentage points to growth in the first quarter, while net exports added 0.5 percentage points, but gross fixed capital formation took 0.3 percentage points from growth. Mining added 0.3 percentage points to growth, and financial and insurance services contributed 0.2 percentage points.

However, the end of Australia's mining-investment boom is expected to weigh on economic growth in the coming quarters, which is likely to urge policy makers to add stimulus. Earlier this week the RBA decided to keep the official cash rate on hold at 2%, having already cut the rate in February and May, but indicated that they further easing remained on the cards if economic data suggests that more stimulus is needed.