Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"The majority of ECB members doesn’t want to go down the large-scale asset purchases route. They’ll exhaust all the easier options they have before going to the bazooka of QE, and will see if they’re enough.”

-Frederik Ducrozet, an economist at Credit Agricole CIB

During the last policy meeting Mario Draghi finally hinted that the ECB is planning to launch the U.S.-style quantitative easing. The President, however, did not specified when and how this unprecedented measure will be used. According to a monthly poll conducted by Bloomberg, almost two-thirds of respondents believe that the ECB will ease its monetary policy in June. Additionally, almost a half of these economists pointed out that Draghi may implement multiple measures, including rate cuts, asset purchases and long-term loans. The meeting is scheduled for June 5.

Still, the question is why Draghi is not pulling the trigger earlier? Inflation at a four-year low, almost record-high unemployment, strong Euro and sluggish growth– it seems that it is not enough for Mario Draghi to add fresh stimulus in the struggling economy. Inflation is expected to pick up in April, easing some of the pressure on the ECB. By holding off from action until June, Draghi gets a chance to see if price gains pick up as winter effect is waning.

This week, another report showed that inflation is weakening further, as France national statistics office said the costs of living increased 0.6% in the third month of 2014. Markets were betting on a 0.7% rise, while on a monthly basis, consumer prices disappointed as well.

USD

“If anything, claims are starting to suggest a net pick-up in employment relative to last year's average”

- Jim O'Sullivan, chief US economist at High Frequency Economics

The U.S. Dollar picked up from a two-week low versus the single currency on Thursday, as the U.S. Labor Department released better-than-excepted data from the nation’s job market. It will be difficult for the Dollar to recover from Wednesday’s losses, provoked by the FOMC minutes, that showed most of the policymakers expect the benchmark interest rate to be lifted next year, while markets were expecting the similar move to be made in the foreseeable futures.

Nonetheless, the economy is sending promising signs, as the number of initial jobless claims nudged down by 32,000 to 300,000 last week, hitting the lowest since May 2007 and outpacing market’s projections for 320,000 claims. The number of continuing claims fell as well, while the less-volatile four-week moving average turned lower to 316,000 from 331,000 a month ago. While payrolls disappointed markets and raised concerns about the sustainability of future growth, fewer dismissals will help to pave the way for a stronger hiring, as domestic demand for labour recovers from harsh winter, providing additional boost to the economy.

Policymakers pay close attention to the weekly report from the Labor Department as figures are the first glimpse into the economic recovery.

GBP

“For now, with the economy growing respectably but not roaring away, we see it likelier than not that the MPC will avoid tightening policy this year, especially with inflation expected to remain below target over the medium term."

- Philip Shaw, Investec chief economist

The cable was trading in a narrow range following the Bank of England meeting, as policy makers offered no surprises, staying pat both on the interest rate and the stimulus programme. The GBP/USD pair moved slightly lower on Thursday, trading around 1.6764 level, posting no impressive moves amid soporiferous central bank’s meeting.

During its April’s policy meeting the nine-member Monetary Policy Committee decided to keep the key refinancing rate at a record low of 0.5%, while the size of its bond-buying programme was also unrevised at 375 billion pounds. A move was widely expected, as Carney made it clear there will be no action any time soon. Nonetheless, investors were expecting for some hints about future moves and possible clarification of the forward guidance. Rapid growth during 2013 added more pressure on the BoE, however, the latest drop in inflation provided additional room for Carney. The inflation rate currently stands at 1.7%- a four-year low and slightly below the official target of 2%. Earlier in April, the IMF claimed the U.K. will be the fastest-growing economy in the G7 this year. According to analysts, the second quarter of 2015 can be a perfect timing to start raising interest rates. By that time inflation is expected to move back into the comfortable zone, while the general drift of comments from the MPC members supports this forecast.

JPY

“The cheap yen has meant that exporters can make profits without increasing output or making new investment. For investment to increase, export volumes have to grow."

- Kazuhiko Ogata, the chief Japan economist at Credit Agricole SA.

Is the economy strong enough to withstand the tax hike? It seems that Kuroda is overconfident about the current state of the world’s third largest economy, as a sharp drop in machinery orders suggests companies are not willing to make huge purchases. Business investment in Japan is stalling and the economic growth will remain tepid for the most of the year following April’s tax increase.

The Cabinet Office downgraded its view of business investment in 16 months, adding more pressure on Shinzo Abe, who pledged to bring Japan to a strong, private sector-led, sustained growth that is not boosted by constant injections of economic and monetary stimulus. The downbeat data was provoked by a 8.8% drop in the core machinery orders for the month of February. Analysts forecasted only a 2.6% decline, suggesting companies are even more concerned about future prospects. On a yearly basis, however, orders rocketed 10.8%. It means that Shinzo Abe’s measures have improved situation and boosted growth following decades of stagnation and deflation. The outlook, however, is not so bright, as policymakers refrained from additional stimulus, suggesting they will wait for more data. Earlier this week the International Monetary Fund said Japanese economy will decelerate to 1.4% this year following a 1.5% expansion seen in 2013.

AUD

"While jobs growth has improved modestly from a trough of 0.4% year-on-year in January, to 0.6% year-on-year in February, the range of leading indicators point to a more significant strengthening in jobs growth to around 1.5% year-on-year over coming months”

-UBS Economics

The Australian Dollar was the biggest mover during the Asian session on Thursday, supported by upbeat unemployment data from Australia, while dovish FOMC minutes dragged the U.S. Dollar lower. On Thursday, the AUD/USD pair gained 0.21%, climbing above the 94-mark. While fundamentals speak in favour of further appreciation, traders believe the rally will be short-lived, as 67% of opened positions is short.

During the last several months, a slew of promising data was providing a strong boost to the Aussie, while domestic labour market remained one of the key concerns for policymakers. That is why markets welcomed stronger-than-expected data with an optimism. Investors sent the Aussie to a 4 1/2 month high, as the unemployment rate unexpectedly fell to 5.8% in March from a revised 6.1%. It was the biggest monthly drop since August and above markets’ expectations. What is more important, the number of people employed soared by 18,100 over the period, climbing after a revised 48,200 a month earlier. The only fly in the ointment was the participation rate that slipped 0.1% to 64.7%. According to the central bank, the employment is likely to weak further, as demand for labour is still fragile due to a massive slowdown in the mining sector. Nonetheless, the latest figures are suggesting the indicator can be moving to its peak.