Daily Forex Fundamental Overview

Fundamental Analysis

EUR

“Most worrying of all from a policy maker’s perspective is the intensification of deflationary pressures”

- Chris Williamson, chief economist at survey compiler Markit

Businesses in the Euro zone began the year on a firmer footing than first estimated. Markit’s final composite PMI rose to 53.6 in January, compared with the flash reading of 53.5 but weaker than December’s 54.3. The final gauge measuring business activity in the services sector was in line with the flash estimate at 53.6, but down from 54.2 recorded in December. Nevertheless, the headline index has remained above the important 50 mark for 31 straight months. The data is consistent with economic growth of 0.4% in the first quarter of 2016, despite the financial markets rout and concerns about the economy of China. Yet, the composite report continued to point to divergences in the 19-nation economy, with Spain and Germany driving growth. France surprised to the downside, with the index at just 50.2, while growth in Italy also slowed. Furthermore, the Euro area’s manufacturing and services sectors cut prices at the fastest pace in almost a year in January, intensifying concerns about weak inflation in the region.

A separate report showed retail sales in the Euro bloc increased for the first time in four months in December. Sales at European retailers climbed by an expected 0.3% in the reported month from November, and by 1.4% from December 2014. The data indicated that the boost to households’ disposable income from lower oil prices continued to support their spending, a key driver of the recovery over the past year.

USD

“The slowdown in the services sector indicators may go a long way in fanning fears of a more pronounced slowdown to U.S. growth momentum heading into 2016”

- Gennadiy Goldberg, an economist at TD Securities

Even though the private sector hiring rose at a slower pace, the US private companies continued to add a robust number of jobs to the economy in January. Employers created 205,000 jobs last month compared with 267,000 in December, according to ADP Research Institute. Economists, however, had predicted a 195,000 advance. The data came ahead of the government’s more comprehensive report on Friday. Economists predict that the report will show employers added 200,000 jobs and the jobless rate remained at 5.0%. Robust hiring numbers contrast with weak data on the overall economy, which grew at just a 0.7% annual rate in the final quarter of last year. Economists foresee growth figures will improve in the current quarter. The world’s number one economy has been hit hard by a strong US Dollar, weakening global demand and an inventory de-stoking, which have pressured manufacturing and export industries.

A separate report showed business activity in the dominant services sector slowed to the lowest level in almost two years in January, suggesting the economic growth faltered at the start of the first quarter. According to the Institute of Supply Management, the index of non-manufacturing activity dropped to 53.5 last month, the lowest level since February 2014, down from 55.8 in December.

GBP

“Worries about a Chinese ‘hard landing’, financial market jitters, higher interest rates in the US, more austerity at home and the possibility of ‘Brexit’ and EU tensions have collectively pushed the business mood in the dominant service sector to its darkest for three years”

- Chris Williamson, the chief economist at Markit

The British dominant services sector continued to expand in January, albeit concerns about financial market turbulence and the possibility of “Brexit” pushed business morale to the lowest level in three years. The Markit/CIPS services PMI climbed to 55.6 last month, up from 55.5 in December, beating expectations for a decline to 55.3. Nevertheless, the reading remained below its average of 57.2 recorded in the three previous years. The survey’s findings were mixed, as new business rose at the fastest pace since July, whereas output growth was weaker compared with the three-year average trend rate and the mood among companies was gloomy. The data came ahead of the Bank of England’s “Super Thursday”, when the central bank will reveal its latest interest rate decision, monetary policy stance as well as the Inflation Report. The overwhelming majority of economists expect the central bank to remain pat, while traders on money markets pushed back their expectations to early 2018.

The UK’s economy, which relied on the services sector to boost growth at the end of last year, is likely to grow 0.6% in the first quarter of 2016, gathering a bit of speed from estimated growth of 0.5% in the December quarter. The National Institute of Economic and Social Research forecast the economy to grow by 2.3% this year.

CNY

“Overall, the fast development of the services sector has to a large extent offset the impact of weakening manufacturing, indicating a better economic structure”

- He Fan, chief economist at Caixin Insight Group

Activity in China’s services sector rose to the highest level in six months in January, underscoring a growing divergence with the manufacturing sector that continues to falter and indicating that the government’s measures is working in some parts of the economy. The Caixin China services PMI climbed to 52.4 in January, up from 50.2 in the preceding month. A reading above the key 50-mark threshold shows expansions, while below indicates contraction. The expansion was underpinned by inflows of new business accelerating to their strongest in three months, according to the report. The pace of job creation at service providers quickened to a six-month high, with some firms planning company expansion. The report showed service providers were generally optimistic about business in the coming year, with the overall degree of positive sentiment rose to its highest level since July 2015. China's service sector has been one of the few bright spots in the economy, helping to offset a sharp slowdown in traditional manufacturing industries. In 2015, services accounted for 50.4% of China's gross domestic economy, up from 48.1% in 2014. China's official nonmanufacturing purchasing managers' index, which includes the construction sector, slid to 53.5 in January from 54.4 in December, according to data from the National Bureau of Statistics. The Caixin China Composite PMI, which covers both manufacturing and services, edged up to 50.1 in January from 49.4 in December, signalling a stabilization of business activity.

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