Daily Forex Fundamental Overview

Fundamental Analysis

USD

“Economic activity appears to have slowed”

- Federal Open Market Committee

The Fed opted not to hike interest rates and remained ambiguous about raising rates in June amid moribund economy and weakening consumer spending. The US central bank proceeded with its plan to move cautiously on raising the benchmark federal-funds rate, which has been between 0.25% and 0.50% since December, when the Fed increased short-term rates after keeping them near zero since 2008. Policy makers pointed that the US economy is performing robustly in some respects, but continuing to falter in others. Household spending has diminished even though real income has increased and consumer sentiment remains high, while the labour market conditions have improved further.

The Fed’s caution underlines how policy makers still lack confidence they can move away from extraordinary easy-money policies without derailing the fragile US growth and knocking the global economy off balance. The seven weeks until the June meeting could help determine how many times, if any, the Fed will hike short-term interest rates this year. Policy makers will get two months of inflation and labour-market data as well as two estimates of first-quarter growth before their next meeting. One major source of uncertainty for policy makers is the UK’s referendum over whether to leave the EU, which is scheduled for June 23, a week after the Fed meets.

GBP

“Today's GDP figures confirmed that the economic recovery cooled in the first quarter, but we think that this should only be temporary and that growth will regain some pace later this year”

- Capital Economics

The British economy slowed in the first quarter, hit by an ongoing decline in the industrial sector and concerns that a looming vote on the country’s membership of the EU will hurt the economy further. According to the Office for National Statistics, the UK economy expanded 0.4% in the three months through March, following a 0.6% growth in the final quarter of 2015. Measured on an annual basis, Britain’s economic output increased 1.6%, down from 2.4%. The slowdown was led by a slump in manufacturing and construction, which offset strong growth in the UK’s dominant services sector. Output increased in the services sector by 0.6% in the first quarter, but production dropped by 0.4%, construction output fell 0.9% and agriculture slid 0.1%.

Bank of England officials said that they expect the economy to expand more slowly in the first half of the year than it did in late 2015 as uncertainty over the referendum outcome forces companies to delay hiring and investment. The OECD said that the British economy could be as much as 3% smaller by 2020 if it leaves the EU than if it stayed in. BoE Governor Mark Carney, meanwhile, highlighted a sharp depreciation in Pound’s exchange rate versus other currencies should Briton’s vote to leave the EU could boost the annual rate of inflation.

NZD

“We expect inflation to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build”

- RBNZ

The Reserve Bank of New Zealand kept interest rates on hold, but said it may need to cut rates further as slowing global economic growth and a strong New Zealand Dollar prolong a period of tepid inflation. All bets are now on the RBNZ cutting the OCR to 2.0% in June. The RBNZ has already slashed the official cash rate five times in less than a year. The central bank is also concerned about the relative strength of the local currency, which is making exporters and import-exposed industries less competitive. The New Zealand Dollar advanced more than 1% following the central bank’s decision.

In March, the RBNZ forecast inflation will return to 1% late this year, and reach the 2% target midpoint by early 2018. Consumer prices climbed just 0.4% in the year through March. Pressures in the housing market is one of the main threats to the domestic outlook, according to RBNZ Governor Graeme Wheeler. The central bank is monitoring the property market amid signs that prices in Auckland are increasing again. Wheeler is aware that lower borrowing costs could add fuel to housing demand and pose a risk to financial stability. On international perspective, flagging growth in China was being closely monitored, and the RBNZ was alert to weakness in other key economies.

JPY

“Kuroda wanted to make it clear the BOJ won’t make monetary policy driven by market demands. It’s too early to make another move after implementing the negative rate a couple of months ago”

- Barclays Plc.

The Bank of Japan kept its monetary policy unchanged and held off on expanding monetary stimulus, sending the Japanese Yen up and stocks down. The BoJ Governor Haruhiko Kuroda and his colleagues opted to take more time to assess the impact of negative interest rates. Policy makers left unchanged three key easing tools: the 80 trillion yen target for expanding the monetary base through government-bond purchases, the 0.1% negative rate on a portion of the cash banks park at the central bank, and a programme to buy riskier assets including stocks. Separately, they postponed the time frame for reaching a 2% inflation target, to sometime in fiscal 2017, for the fourth delay in about a year.

The BoJ inaction comes despite a further deterioration in Japan’s economic landscape since the previous policy meeting held in March. The world’s largest economy is at a risk of contracting in the current quarter due to earthquakes that hit the nation’s southern areas earlier this month. Moreover, the latest inflation data show consumer prices, including energy prices, dropped 0.3% in March compared with year-earlier levels. Inflation expectations among households are also at the weakest level in three years, while wage growth has slowed as the global slowdown makes businesses more cautious.

 

 

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