Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"The slowdown will put pressure on policy makers at the European Central Bank to do more to prevent the recovery from stalling, and we will no doubt see more calls for full-scale quantitative easing to be implemented”

- Chris Williamson, Markit's chief economist

Mixed news came from Europe on Tuesday, with Spanish manufacturing rising more than expected, while factory activity in Italy declined somewhat. Spain’s manufacturing sector continues to expand for the sixth consecutive month in May and at more rapid pace than initially was expected, adding to evidence that economic growth accelerated in the second three-month period. The corresponding index climbed to 52.9 from 52.7 in April, moving further away from the 50-threshold, which separates growth from contraction in activity. Moreover, the survey results signal that growth is likely to keep the pace in the coming months, with a number of new orders rising boosted by an export increase. Meanwhile, growth in the Italian manufacturing sector slowed fro the second straight month, underscoring economic recovery remains slow and fragile. The Markit/ADACI PMI came in at 52.6 down from 53.2 seen a month earlier and 54.0 in April.

Overall, the Eurozone’s manufacturing sector shrank in three months to June, with the headline gauge falling to 51.8 in June down from 52.2 in May. Activity slowed across European core countries, including Germany, Austria and the Netherlands. France and Greece saw their manufacturing activity contracting.

USD

“The normal business cycle seems to have returned"

- Mikee Johnson, chief executive of Cox Industries

U.S. manufacturing sector growth slowed slightly in June, though number of new orders rose to the highest level in six months. The greenback weakened for a fifth straight day versus an index of major peers following the data release. The Institute for Supply Management said the corresponding index fell to 55.3 from 55.4 in May, with any number above the 50-mark indicating expansion. The forward-looking new orders subindex climbed to 58.9 up from 56.9 in May, the highest level since December, whereas the production subindex declined to 60 from 61 a month earlier, but remained consistent with a solid growth in the Fed’s measure of industrial production. While production and new orders rose, the strength has not yet translated into higher hiring levels, with the employment reading being unchanged at 52.8 in June suggesting only a small gain in factory payrolls. Instead of hiring, manufacturers improves productivity in order to meet demand.

The PMI averaged 55.2 in the three months to March up from the first quarter reading of 52.7. The ISM report follows other data, which showed the U.S. economy expanded faster in the second quarter after the growth slowed at a 2.9% annual rate due to harsh winter weather in the beginning of the year. The positive data generates optimism among manufacturers.

GBP

"UK manufacturing continued to flourish in June, rounding off one of the best quarters for the sector over the past two decades,"

- Rob Dobson, senior economist at Markit

Manufacturing activity in the U.K. rose at the fastest pace in seven months in June, creating new jobs in the sector and fuelling optimism about the nation’s economic prospects. The Markit/CIPS UK manufacturing Purchasing Managers’ Index surged more than expected to 57.5 in June up from 57.0 a month earlier, reaching the highest level since November. In contrast, analysts had estimated a fall of the index to 56.8. The data adds to evidence that the U.K.’s consumer-led recovery is becoming more balanced and sustainable. Britain’s industry experienced the strongest annual growth in more than three years in April, while data released last week highlighted the importance of business investment for a strong growth in the first quarter, when the nation’s economy expanded 0.8%. The recent numbers are likely to reassure officials, who have wanted to see a more broad-based recovery on the back of greater exports, manufacturing activity and business investment. The continued strength of U.K. business activity indicators increases likelihood that the BoE will hike interest rates from ultra low level of 0.50% before 2015.

The Pound strengthened versus the U.S. Dollar immediately after release of data, with GBP/USD inching higher 0.15% to trade at 1.7131 compared to 1.7103 ahead of data.

AUD

"On present indications, the most prudent course is likely to be a period of stability in interest rates."

- Glenn Stevens, RBA Governor

The Australian Dollar skyrocketed to its highest level in 2014 amid the Reserve Bank of Australia’s decision to maintain the benchmark interest rate unchanged at 2.5% for the eleventh straight month. The Aussie rose to 94.6 U.S. cents immediately after the announcement on Tuesday. Last time when the RBA changed the rate was in August 2013, when the central bank cut it by a quarter of percentage point. Many economists do not expect any rate change at next board meeting on August 5. They believe the next move will entail rate hike, but not earlier than at the end of 2014.

The officials highlighted an apparent improvement in economic growth, but it will take some time for unemployment to decline consistently despite upbeat data for the labour market in recent months. Thus, Glenn Stevens, the RBA Governor, believes that low cash rate is helping to bolster the Australian economy, saying that the growth will be a little below trend over the year ahead. Inflation is expected to be in line with the 2-3% target over the next two years. Stevens also added that the monetary policy is appropriately configured to support sustainable economic growth and inflation consistent with its target band. Furthermore, he reiterated that the Australian Dollar remains high by historical standard, especially given drops in key commodity prices.

CHF

"During the next few months the Swiss economy can be expected to run unspectacularly"

- KOF

Switzerland’s manufacturing production index rose in June after falling a month earlier as an increasing backlog of orders contributed to the index’s gain. The Swiss Purchasing Managers’ Index climbed to 54.0 points in June, up from an unrevised 52.5 in the previous month and overshooting analysts’ expectations for a 52.5 reading. The June gauge marks the 14th straight month that Swiss factory production remained above the 50-mark threshold that shows difference between contraction and expansion. The Swiss National Bank’s floor of 1.20 Swiss francs to euro ensured the country’s robust manufacturing performance. The floor was introduced in September 2011 to weaken the currency and support exporters to the Eurozone, which represents the biggest market for Swiss exports. The latest PMI is broadly in line with improved Swiss KOF leading economic indicator data, which was released on Friday. Following the data, the Swiss Franc traded mixed versus other major currencies. While the Franc changed little against the Pound, it rose versus the rest of counterparts.

The Swiss department of economics expects the economy to grow this year at about 2%, boosted by higher exports to the Euro area, the same rate forecasted by the Swiss National Bank.