Daily Forex Fundamental Overview

Fundamental Analysis

Last week’s overview, this week’s key events

Las week brought a plethora of positive news from the U.S. and U.K., while the Eurozone and Pacific region posted slightly disappointing economic data. U.S. private sector created more jobs than expected, adding to evidence that the U.S. job market is improving. According to the ADP Research Institute, companies added 281,000 jobs in June, exceeding the most optimistic forecasts. Also, non-farm payrolls rose 288,000 after a revised 224,000 increase a month earlier. As a result, the unemployment rate in the world's number one economy declined to the lowest level since September 2008, adding to evidence that the recent contraction was just a temporary blip. On Wednesday Janet Yellen delivered the most significant speech in her Fed chairmanship. She pushed back against the idea the U.S. central bank should consider hiking interest rates to prevent fueling future financial crisis. Yellen reassured the public that the Fed will not consider raising interest rates simply because some markets may look bubbly. Nevertheless, recent signs of an accelerating U.S. recovery spurred speculation the Fed will announce the timing of interest rate hikes.

Meanwhile, on the other side of the Atlantic, the economic data from the U.K. continued to surprise analysts and markets to the upside, driving the Pound to new highs. The Pound closed the week at 1.7152 versus the U.S. counterpart rising 0.69% over the previous five working days. The Sterling has strengthened broadly since the beginning of this year, gaining more than 15% against the greenback amid expectations that the robust U.K. recovery will prompt the BoE to raise rates before the end of the year. Meanwhile, the Eurozone continued to show uneven economic picture, with periphery countries showing signs of steady recovery, while the core countries posted weaker economic data. The EUR/USD ended Friday's trading session at 1.3594, down 0.35% for the week, following better-than-expected U.S. employment report.

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.

This week’s key highlights will be confidence gauges in Australia, business activity in the U.K., as well as the FOMC meeting minutes. In addition, the data on Thursday will show whether the U.S. economy is capable to sustain the pace of job creation and whether the BoE will leave it benchmark interest rate unchanged.

EUR

"There remain, however, many uncertainties and risks which could delay or even reverse this path to recovery"

-George Provopoulos, Bank of Greece outgoing governor

The Euro Working Group, that includes Eurozone finance ministry officials and representatives from the European Commission and European Central Bank, has approved the disbursement of the next batch of Greece’s bailout loan on Friday, after the country met outstanding reforms goals that had delayed the payment. Greece successfully met six targets, including passing legislation and reforming pharmaceutical sector to lower pharmacies’ profit margins and consequently prices, which formed the condition for the 1 billion euro instalment. Eurozone finance ministers are expected to formally approve the loan in a meeting in Brussels on July 7.

Greece has relied on international financial help worth a total 240 billion euros from other 18-nation area’s countries and the International Monetary Fund since May 2010, when it became unable to raise funds on bond markets due to the financial crisis. In return, as part of the conditions for its bailout it has had to overhaul its economy and impose spending cuts and tax hikes, all under a strict supervision of its creditors. Greece successfully returned to bond markets in April, when the yield for the nation’s five-year bonds fell below the 5% threshold to 4.95%, while the auction was oversubscribed.

USD

“Despite the many responses to the crisis … recovery is modest, laborious, fragile, and measures to boost demand, despite the goodwill of central banks, will find their limits”

- Christine Lagarde, IMF director

While Americans celebrating one of their beloved holidays, Independence Day on fourth of July, and markets are closed in the U.S., the International Monetary Fund Director Christine Lagarde hinted that the fund may be preparing to revise its global economic outlook downwards, as she said that a pick-up in economic activity could appeared to be less robust than projected amid lower levels of investment and that risks remain in the U.S. even as its growth recovery accelerates. Lagarde’s comments highlight the threats to the world economy at a time when the Federal Reserve is cutting its massive stimulus and the European central Bank is combating inflation, which is less than half its targeted level. The IMF is going to update its economic projections this month after forecasting April 8 that the global economy will grow 3.6% this year and 3.9% in 2015.

Growth in the world’s number one economy is set to accelerate in the near term, Lagarde said, adding that threats to the U.S. growth include the central bank’s ability to scale back its asset purchases in an orderly manner and that of the Treasury to put in place a medium-term budget framework. Currently central bankers are discussing how long to keep interest rates low after completing a bond-buying programme, which is expected to end late this year. Janet Yellen said last month the Fed does not intend “to signal any imminent change” in policy as well as that the balance sheet will remain large “for some time.”

GBP

"France was performing reasonably well until a couple of years ago. For example, it didn’t have as deep a recession as the UK and initially recovered rather better than the UK. But it’s the last couple of years where the UK has achieved a take-off, whereas France has been left on the runway”

- John Hawksworth, PwC’s chief economist

U.K.’s younger workforce and flexible hour market will make Britain the second largest economy in the European Union by 2020, outperforming France. According to the PwC research, rapid employment growth and strong economic performance of the U.K. over the past year will make the U.K. the world’s fifth largest economy before the end of the decade. The accountancy firm also said that rigid labour laws and slow progress on structural reforms in France will push the country’s GDP ranking down over the next 20 years. Meanwhile, growth in Germany is seen to slow in the coming years due to the country’s ageing population, enabling Britain, now the world’s sixth largest economy, to close the gap between the two countries.

However, PwC said the growth acceleration of the Indian economy with its even younger workforce would push it up from being the 10th largest economy in 2013 to the third largest by 2030, pushing the UK back into sixth place. Therefore, PwC urged policymakers in the Britain to implement further structural reforms to guarantee that the country remained ahead of developing markets. It said a broader analysis of Britain’s economy based on factors including inequality and education standards ranked the country fifth among the G7 nations. Last week a series of data showed the country’s robust activity in services, manufacturing and construction sectors.

AUD

"Each of the monthly job ads series fell in May, which in the context of the recent deterioration in consumer confidence, could be an indication there has been a budget effect on business confidence”

-Warren Hogan, ANZ chief economist

Australian job advertisements have bounced back in June following a sharp fall a month earlier, when spending cuts and tax increases announced in the federal budget limited business hiring intentions. The rebound in advertised job opportunities added to signs the country’s labour market has begun to improve amid Australia’s economic transition. Job ads rose 4.3% month-on-month after the 5.6% decline in May, according to the ANZ data, driven by a 4.5% jump in internet job ads, whereas newspaper job ads fell 2.3%.

Last year advertised job opportunities tended to be weaker, indicating Australia’s during a transition in the resource sector from robust investment over the last decade to now much lower levels of investment. Policy makers have attempted to spur economic growth in non-mining sectors of the economy by embarking on accommodative monetary policies, bringing interest rates to record low. Last week the RBA decided to keep the key policy rate unchanged at 2.5% and reiterated that a period of stability in interest rates is needed to bolster sustainable growth in demand. The central bank also stressed that it would likely be some time before the unemployment declined consistently. The Australian Bureau of Statistics is due to release labour market data for June on Thursday, which is projected to show the jobless rate climbing to 5.9% from 5.8% a month earlier.