Daily Forex Fundamental Overview

Fundamental Analysis

Last week’s overview

While leading European economies are weakening and showing signs that they are struggling just like periphery countries, the U.K. has reached top of the world, outperforming the U.S., Japan, as well as European neighbors. The U.K. economy grew 3.2% in the three months through June compared with the same period last year. The data confirmed that the U.K. had finally climbed out of its longest downturn since the war with the economy being 0.2% above the pre-crisis peak. Meanwhile, the country’s central bank is sending mixed messages to markets. The Bank of England Governor Mark Carney, who said that the central bank may still hike interest rates sooner than anticipated if economic data indicates a sustainable growth in real wages. Recent Carney's comments came in contrast to what he said when the BoE's Inflation Report showed policy makers revised growth of wages outlook to 1.25% in 2014, from 2.5% they had forecasted in May. Meanwhile, the latest minutes showed that Monetary Policy Committee's unanimity breaks up, as two Bank of England officials unexpectedly voted to start increasing interest rates in August, marking the first split on rate at MPC since July 2011. Martin Weale and Ian McCafferty were in favour of raising interest rates to 0.75% from 0.5%, whereas the rest of policy makers voted to keep the base rate at a historic low of 0.5%. Thus, now it is the only a matter of time, when finally all policy makers will be ready to hike rates.

In the meantime, Europe is sending alarming signals of mounting weakness, as economies have now started to feel the effects of Russia’s embargo. Thus, European politicians call for more actions from the ECB. Italian Finance Minister Pier Carlo Padoan said he is convinced that the central bank will take steps to boost growth and stem the threat of deflation in the Euro zone. French Finance Minister Michel Sapin urged the European Central Bank to act to bring the single currency down to a level he described as more "normal." Sapin has also prompted the ECB in recent days to stimulate the Euro zone economy following recent disappointing growth figures.

Across the Atlantic, the U.S. economy continues to provide upbeat data with ongoing improvement in the labour market and recovery in the housing market. The U.S. Dollar is getting closer to the last quarter's peak, which is reinforced by the monthly R2 level, and it may prove to be difficult to break, even though most monthly indicators are presently bullish. The July high at 103 will be expected to keep the price afloat, in case there is intensive selling. But once USD/JPY surpasses 104, there will be few doubts the price is going to challenge 2014 high at 105.50 next.

EUR

“The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term.”

- Mario Draghi, ECB President

Within the annual economic symposium, held in Jackson Hole by the Federal Reserve Bank of Kansas City, the ECB President Mario Draghi has made a strong commitment to start the long-awaited asset purchases program. Alongside, Mario Draghi pointed on a more significant role of local governments of single currency area’s member states, as they could loose their fiscal policies to push spending and inflation up. Consumer price index in the single currency area has dropped to 0.3% in August, far below the ECB target of just under 2%. Economists and academics express confidence that the QE will be initiated soon in order to avoid the Japanese-style deflation, as domestic economy in the Eurozone stagnated in the second quarter. Analysts at a number of banks predict the asset purchases to begin in December with a total amount of 1 trillion euros; however, the next time the Governing Council of the ECB will meet already on Sep 4.

USD

"The economy has made considerable progress in recovering from the largest and most sustained loss of employment in the United States since the Great Depression"

-Janet Yellen, Fed Chairwoman

The world's top central bankers appeared to find it difficult to move away from the ultra loose policies they have embarked on repeatedly during a long and fragile global recovery. During long-awaited speech at Jackson Hole, Fed Chairwoman Janet Yellen expressed concerns about moving rapidly away from the Fed’s ultra-low interest-rate policies even as the job market improves and inflation inches higher. She said that the recent rapid decrease in the jobless rate likely overstates the labor market health, and the Great Recession may have caused drastic changes in the job landscape. Thus, she reiterated the pledge to lift the benchmark interest rate only in case the labor market continues to gain traction at a more rapid pace than anticipated by the Committee or if inflation increases more rapidly than projected. Prior to the speech Yellen was not expected to announce major policy changes, but investors hoped she would provide some clarity on when the Fed will consider raising interest rates.

GBP

“The path of interest rates that’s necessary to meet our mandate is going to be materially different than it has in the past.”

- Ben Broadbent, Bank of England Deputy Governor

Speaking at the economic symposium in Jackson Hole this Saturday, the Deputy Governor of the Bank of England and, respectively, the MPC member Ben Broadbent mentioned the future perspectives for interest rates in the U.K. He pointed out several conditions, which are likely to determine the level of interest rates, including the first rate hike from the BoE, which is going to take place in the nearest future. The changes will come from the Bank’s mandate itself, which currently combines inflation level and economic growth in setting the rates. With productivity growth getting more unpredictable, the regulator will look at the unemployment level even closer, taking into account the Forward Guidance of the previous year. Ben Broadbent underlined the importance of changing jobless rate and growth levels during the crisis time. Last week, the MPC votes split 7-2 in favour of keeping the interest rates unchanged.

CAD

"Since there have been no signs of improvement in domestic economic conditions we don’t expect to see any further long-term increases in the core inflation”

- David Madani, economist at Capital Economics

Canada’s cost of living growth slowed in July for the first time in five months amid fall of gasoline prices. The inflation rate rose 2.1% from the previous year and compared to June’s reading of 2.4%, Statistics Canada said. The biggest contributors to the rise of in consumer price index were shelter and food, which advanced 3.0% and 2.9%, respectively. However, gasoline prices increased modestly by just 2.1%, following the 5.4% rise a month earlier. The core CPI, which excludes eight volatile components, was up by 1.7% on a yearly basis, after soaring 1.8% in June. The Bank of Canada continued to highlight that the recently higher inflation will last for a long time, underscoring transitory factors, such as higher prices for energy, food and a lower local Dollar. On the back of news, the Canadian Dollar traded slightly lower versus the Greenback, losing 0.11% to C$1.0952.

Separately, another report showed that consumers supported the nation’s economy, as retail sales increased for the sixth consecutive month, surging 1.1% to $42.6 billion in June, exceeding economists’ forecasts. The main drivers appeared to be the early rounds of the FIFA World cup, which spurred sales of wine and beer, and consumers’ spending on lawn and garden products. Core retail sales, excluding the auto sector, jumped five times faster than projected, soaring 1.5% to C$32.61 billion from an upwardly revised 0.3 gain in the previous month.