Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"There should be only a minor negative impact if the current uncertainty about Ukraine's political future continues but there's no major military escalation”

-Timo Klein of IHS Global Insight

The latest poll conducted by Reuters showed that Europe’s largest economy will grow almost five times as fast this year as in the previous one. The findings echoes with the official estimates from the German government that were released earlier this week, showing the economy will post a 1.8% growth this year and accelerate to 2.0% in 2015, supported by strong domestic demand and low unemployment. German private consumption is projected to rise 1.3% this year, while exports will recover as well, posting a 5.5% surge, recovering from last year’s sluggish growth.

It is important to mention that all these projections are made with one remark– if only there is no major escalation of the standoff between the West and Russia over Ukraine. While Obama urges for more sanctions for Russia, cautious and pragmatic Angela Merkel is not in a hurry to inflict more pain on Russia. While during a series of frequent phone calls Merkel tried to defuse the Ukraine ongoing crisis, her efforts failed, and it seems that now she is ready to embrace sanctions the United States have been calling for. According to people familiar with the matter, Germany is now making plans for the next set of economic sanctions that will be more harmful to Russian business interests. A sound of cautious was noticed in one of Germany’s largest business daily, Handelsblatt that warned the nation’s leading economic associations fear the consequences of the latest events.

USD

“Not only have you had a slowdown in layoffs, but also the total number of people on state benefit rolls has fallen. The labor market is getting better.”

- Brian Jones, senior U.S. economist at Societe Generale

On Thursday, a weekly report from the U.S. Department of Labor confirmed that the latest weakness in the economy was only temporary and caused by harsh winter conditions. A stronger-than-expected jobless report, however, had little impact on the U.S. Dollar, as the currency was still undermined by the words of Federal Reserve’s Chairman Janet Yellen.

The number of initial claims for jobless benefits increased only by 2,000 last week, hitting 304,000, surprising markets to the upside, as analysts claimed for a 16,000 increase. Despite a slight deterioration, the indicator still hovered around the lowest level since September 2007. Additionally, the total number of people receiving benefits sank to the lowest level since the beginning of the global financial crisis. The less volatile four-week moving average, which is considered as a better measure of underlying labour market conditions, declined 4,750 to 312,000, also hitting the strong psychological level– the lowest since October 2007. American companies are reducing dismissals, leaning from recession-era, job cutting and preparing for stronger sales as the latest indicators are pointing at the ongoing economic recovery. Even with the broadening improvement, Yellen claimed that there is no time for complacency and policymakers should focus on the target of reaching full employment.

GBP

“The strength of this labour market report was a surprise, which makes it hard to justify that all of the good news surrounding the UK economy is already in the price, so there may be the potential for further upside for sterling”

- Kathleen Brooks, research director at broker Forex.com

This week’s extremely positive data from the U.K. labour market added more pressure on Mark Carney to start raising rates finally. At the same time, the Pound is trading around its four-year high versus the greenback, posing a potential unwanted side-effect for the nation’s companies to tackle in the months ahead. An appropriate level of the exchange rate has helped exporters to lead a manufacturing recovery, making the country more appealing for global tourists and investors. But with the unemployment below the 7% threshold for the first time in five years and the ongoing recovery in the country, the cable is poised to break over the 1.70-mark. This level will undermine British exporters’ ability to compete globally.

At the time being, a survey from the Treasury found out that economists believe the Bank of England can more than triple its key refinancing rate next year, pushing it up to 1.75%. Higher borrowing costs can potentially provide a respite to the country’s pensioners, who have seen the savings rate shrinking due to the impact of high inflation and rock-bottom returns. Earlier this month David Cameron pledged the country will see “a brighter future” soon, while a recent pickup in wages is supporting the case the remaining slack is decreasing. All these factors are speaking in favour of self-perpetuating cycle of currency appreciation, meaning all Sterling-crosses will continue climbing higher.

JPY

“Consumer sentiment has been undermined to a large extent by rising prices. We expect a major retreat in sentiment from April as the tax hike drives inflation.”

- Naohiko Baba, Goldman Sachs Group Inc. economist

Can Japan’s consumers cope with effects caused by the consumption tax hike made on April 1? This question has been torturing minds of analysts and policymakers for quite a long time already. Shinzo Abe’s policies boosted both growth and consumer prices, however, it seems that effects caused by Abenomics are already waning, while the Bank of Japan is reluctant to make any fresh steps.

Each report from the world’s largest economy will have a stronger impact on the markets, as the central bank monitors economic performance to calculate the perfect timing for another strike. Therefore, it was rather surprising that a release of consumer confidence had almost no impact on the Yen. The Cabinet Office said a gauge of the mood among Japanese consumers eased to 37.5 in March from 38.5 a month earlier, hitting the lowest since August 2011. Despite a drop in sentiment, almost 90% of respondents expect a price increase over the next 12 months, the highest in comparable data back to 2004.

Each set of disappointing data adds more pressure on Abe, who risks the public souring on his campaign to sustain a stable growth as amid rising prices, wages still stagnate. A drop in confidence can result in weaker spending, and make it even more difficult to drive a rebound from a contraction forecast in the second quarter.

CAD

"BoC Governor Stephen Poloz sounded very dovish, not shutting the door to rate cuts given still important downside risks to inflation and elevated risks from household imbalances”

- UniCredit

The loonie has ended this week on a high note, as on Friday there is a bank holiday in Canada, therefore, markets will be driven by earlier events like the BoC meeting or the inflation data that came above market’s estimates. The USD/CAD pair advanced 0.15% to 1.0998 immediately after the release of the data, recovering from its two-week low reached in the previous session, as the Bank of Canada showed its intention to stick to the chosen course.

On Thursday, the Statistics Canada said that March’s inflation rebounded amid rising energy prices that triggered the biggest gain in shelter costs in more than three years. The costs of living in the land of the maple leaf advanced 1.5% last month after slowing to 1.1% in February. The less volatile core rate, which strips out eight volatile products, climbed 1.3% accelerating from 1.2% in February. The core measure met the consensus forecast, while the overall inflation outpaced analysts’ predictions by 0.1%. Shelter costs represents around 26% of the total CPI index, and a 2.7% increase that was the fastest since December 2010, made its significant contribution to the upbeat figure.

The inflation rate and the housing market are the main concerns for the Bank of Canada, and while Thursday’s report can be a welcoming sign, the Unicredit bank believes an increase in consumer prices will be short-lived, while USD/CAD will reach 1.12 in Q4 2014.