Daily Forex Fundamental Overview

Fundamental Analysis

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

As it was widely expected none of the major central banks provided any surprises to markets, as all banks kept their monetary policy steady and maintained their benchmark interest rates untouched. While some reiterated their pledge to keep borrowing costs at current level for some time, others like the Bank of England faces increasing debates over rate hikes amid improving economic conditions. As the outcome of central banks decisions was predictable, the corresponding currency showed a muted reaction, being little changed following monetary policy announcements.

Europe continues casting further concerns over its ability to ensure a sustained recovery this year, as even Germany, Eurozone’s powerhouse, has been posting weaker than expected fundamentals and moving closer to recession, while Italy has once again entered the downturn. Thus, hopes for a swift rebound in Germany are fading and the country is far too weak to pull southern Europe out of the doldrums. This week will shed some light on the German economy growth, with the nation’s preliminary GDP figures are due to be published on Thursday. Meanwhile, the ECB kept the benchmark interest rate at 0.15%, after cutting it from 0.25% in June, and waiting for the recently launched stimulus to spread over the economy. The shared currency weakened versus the U.S. Dollar during the week ended 8 August, falling below the 1.34 mark for the first time since November 2013. A weaker Euro should not only support exporters, but also prove a buffer against deflation; however, the damage already runs deep.

Meanwhile, in another part of the world, Australia saw its jobless rate jumping to the highest level in 12 years, largely due to a rise in a number of people, who are actively looking for work. The worse than expected data lowers expectations of a near-term interest rate lift as the nation's economy shows signs of weakness. The RBA downgraded its growth and inflation outlook on a steeper decline in mining investment and reiterated interest rates will remain on hold. The Aussie Dollar also lost versus its U.S. namesake, providing some relief for the nation’s exports and the RBA, which believes the currency is overvalued.

In contrast, Britain's strengthening economy, which grew an annualized 3.2% in the second quarter, means the BoE is on course to be the first of the world's major central banks to lift interest rates from historic lows and debates are heating up among MPC members over the timing of rate lift. The official data on the U.K. economic performance is due to be published, with a particular interest being placed on BoE Inflation report and second estimate of GDP.

EUR

“Despite the positive result in the first half of the year we are alarmed by the escalation of the trade conflict with Russia"

- Anton Boerner, head of the BGA trade association

While Germany, European biggest economy, continues missing economists forecasts, France recorded an improvement in industrial output in June. French industrial production rebounded, rising as much as 1.3% following the 1.6% decline in the preceding month, while analysts had expected a 1.0% increase. This brings the annual rate of change in output to -0.4% compared with -1.8% projected and -3.4% prior. Manufacturing production advanced 1.6% in June, following a decrease of 2.3% recorded in May. Meanwhile, the manufacturing gauge declined to 47.8 points in July, Markit said earlier this month, down from June's 48.2. Analysts have long been sharing negative outlook on the French economy, as it is believed that so far not enough have been done politically to improve competitiveness of the economy. Hence, France is expected to continue to underperform in the coming years.

Meanwhile, German trade surplus narrowed in June compared to the previous month. The country’s foreign trade generated a non-seasonally adjusted surplus of 16.2 billion euros in the reported period, down from a 18.8 billion euros registered in the previous month. Destatis said in its latest report that exports had increased 0.9% in June, while imports jumped 4.5%, their strongest monthly gain since November 2010. Even despite a marginal boost from trade, a contraction in GDP is expected.

USD

“The key message here is that labor costs remain subdued and unlikely to represent a source of rising production costs and or inflationary pressures any time soon"

- Anthony Karydakis, chief economic strategist at Miller Tabak

U.S. nonfarm productivity rose more strongly than expected in the three month through June, while a dramatic decline in unit labour costs indicated still tame wage pressures, providing the Federal Reserve with room to keep interest rates low for a while. According to the official data of the Labor Department on Friday, productivity gained as much as 2.5% annual rate following a 4.5% contraction in the first three-month period, the fastest drop since the final quarter of 1981. In contrast, economists had projected productivity to increase at a 1.5%rate in the second quarter. Productivity, which measures hourly output per worker, was previously registered to have fallen at a 3.2 % rate in the January-March period. The rebound in productivity follows a bounce back in the nation’s GDP in the second quarter, when the economy expanded at a 4% pace after shrinking 2.1% in the first quarter. The trend in productivity, however, remains sluggish. Compared to the same period last year, productivity increased 1.2%. Unit labour costs, the price of labour per single unit of output, ticked up at a 0.6% rate after advancing at a revised 11.8% rate, which was the quickest since the fourth quarter of 2012. The Fed is closely monitoring wage growth as it ponders the future monetary policy. While the tame unit labour costs suggest the U.S. central bank should be in no hurry to begin lifting its benchmark interest rate, other measures such as income and the employment cost index point to some firming of wage pressures.

GBP

“Weaknesses in the global economy are still a problem and the challenges facing UK exporters are being made even greater by the strengthening pound."

- David Kern, chief economist at the British Chambers of Commerce

Britain’s trade gap unexpectedly widened in June, fuelling concerns over the effect a strong Pound is having on competitiveness of British goods abroad. According to figures from the Office for National Statistics, the nation’s trade deficit reached 9.4 billion pounds, compared to 9.2 billion pounds in May after U.K.’s exports declined more than imports, as geopolitical crisis between Russia and the west, moribund Euro zone’s economy and a strong Pound are making British goods more expensive abroad and weighing on foreign demand for U.K.’s goods in the short term. Economists, however, had expected trade deficit to come in at 8.8 billion pounds. Led by drop in energy products and other manufactured goods, ONS said the value of exports fell by 400 million pounds to 23.5 billion pounds. The amount Britain imported also declined slightly in June by 100 million pounds to 32.9 billion pounds, led by fewer oil and aircraft sales.

The Sterling has strengthened over recent months as investors expect that the Bank of England will be the first of the major central banks to lift interest rates, either towards the end of this year, or in early 2015. So far this year the Pound rose to the upper bound of the 1.67 level up from a lower range of the 1.64 point in the beginning of the year, thus gaining as much as 2.2% versus the U.S. Dollar.

JPY

“Japan's economy is likely to continue recovering moderately with the effect (of an April sales tax increase) seen gradually subsiding"

- Haruhiko Kuroda, BoJ Governor

The Bank of Japan downgraded its outlook on the nation’s exports amid escalating geopolitical woes, the second cut of its view on outbound shipments in six months, highlighting the BoJ’s fears about the global economy. However, the BoJ Governor Haruhiko Kuroda remained optimistic about the outlook for the world's third-biggest economy, underlining the central bank's conviction that no fresh stimulus is required to combat the impact of a sales tax hike in April. As widely expected, Japan’s central bank left its key policy unchanged, under which it has pledged to increase base money by 60 trillion yen to 70 trillion yen a year through aggressive asset purchases to boost the weak economy and drive inflation towards 2% target next year, believing the economy appears to be on track to achieving the goal without further stimulus. It stuck to its overall assessment that the economy is recovering moderately, and upgraded its assessment of incomes and employment. Nevertheless, the central bank also acknowledged “some weakness” in industrial output. While the BOJ already expects Japan’s economy to shrink in the second quarter due to the tax hike effect, the contraction may prove to be bigger, while the rebound more modest, than expected given the delay in an export increase and weak household spending.

The Japanese Yen gained to its two-week high versus the U.S. Dollar, as ongoing risk-off sentiment supported the safe haven currency.

AUD

“The unemployment rate is likely to remain elevated for a time and is not expected to decline in a sustained way until 2016"

- Reserve Bank of Australia

The Reserve Bank of Australia downgraded its growth and inflation outlook on a steeper decline of mining investment and reiterated its pledge to keep interest rates unchanged. Following the release of Monetary Policy Statement, the Australian Dollar weakened versus the U.S Dollar namesake to trade at $0.9248 compared with $0.9267 ahead of the statement. While the Australian dollar has eased from a peak last year, the RBA said the exchange rate remains elevated, particularly given the recent falls in commodity prices. A month ago, RBA Governor Glenn Stevens tried to talk the nation’s currency down during his speech in Hobart, but the Aussie’s status as a safe-haven currency and the yield spread over other developed market assets has kept it in a band between $0.93 and $0.95 since early June.

After a upbeat start to the year, economic growth has declined to a more moderate pace as exports declined, while retail sales and consumer confidence weakened. The RBA expects growth will be a little below its long-term trend of around 2% to 3% in the year through June 2015, down from a range of 2.25%- 3.25% forecast three months earlier. On core inflation, the RBA lowered its forecast to 1.75% to 2.75% from 2.25% to 3.25% in May, the statement indicated. Australia is losing its developed-world-beating status as the mining investment boom that powered it through the global financial crisis wanes.