Daily Forex Fundamental Overview

Fundamental Analysis

Highlights of the week ended April 10

UK

The Old Lady of Threadneedle Street, also known as the Bank of England, left its monetary policy unchanged at the April meeting to see whether a decline in inflation is temporary or exacerbates and turns into a threat for the UK economy. In the last interest rate decision before the general election on May 7, the central bank maintained its benchmark borrowing rate at 0.5%. More details on vote composition among the nine-member Monetary Policy Committee will be revealed in the meeting minutes due out on April 22. The BoE remains in wait-and-see mode as new outlook looms. Officials will report on their forecasts for inflation, economic growth, and the labour market on May 13 as part of the quarterly Inflation Report.

Australia

The Reserve Bank of Australia held interest rates at 2.25% for the second consecutive month, referring to a slight improvement in activity and Sydney house price inflation in its decision. The move came as a surprise to financial markets, which had priced in a 70% possibility of an interest rate cut. However, the RBA said further interest rate cuts are still on the cards over the period ahead in order to ensure sustainable growth in demand and inflation consistent with the official goal. The central bank's last reduction, in February, was the first in 18 months. It was designed to foster non-mining growth in the face of tepid consumer spending and business investment.

Japan

The Bank of Japan kept its monetary policy settings and its sanguine view on economic prospects unchanged , reiterating that the world's third largest economy is recovering steadily. In line with expectations, by an 8-1 vote the central bank decided to maintain a pledge to expand the monetary base at an annual pace of 80 trillion yen. The BoJ board member Takahide Kiuchi proposed the central bank to reduce its asset purchases to 45 trillion yen a year. In an accompanying statement, the BOJ said consumer inflation, excluding the sales tax increase that came into effect in April last year, currently hovering at 0%, will remain around that level for a while on the back of a plunge in oil prices. Given the excessively low inflation, there is mounting speculation that the BoJ will soon expand its qualitative and quantitative easing programme from the current 80 trillion yen per year, possibly as soon as the end of April when the BoJ board next meets. The BOJ has stood pat on policy since expanding stimulus in October last year to prevent plunging oil prices, and a subsequent decline in inflation, from delaying a sustained end to deflation.

US

Fed officials remained divided on the timing of the first interest rate lift-off in almost a decade, the official account of the FOMC's March meeting showed. Policy makers were considering a wide range of possible rate hike dates with some of them still believing the meeting in June as an appropriate time to begin normalizing monetary policy. Others, however, favoured the first increase in the federal funds rate since the financial crisis to come later in the year as they remained unsure about how long energy-price declines and a stronger Greenback would distort inflation data. There were also a number of policy makers, who argued that the world's biggest economy would not be ready for tighter policy until 2016. The disagreement could present a challenge for Fed Chairwoman Janet Yellen in the months ahead. Yellen led officials to a unanimous decision in March to drop a pledge to be "patient", the change which effectively opened the door to rate increases by midyear. Yet tough decisions now loom about whether to move then.

EUR

“Business leaders are likely to continue with their wait-and-see attitude and will be little-inclined to accelerate their investment significantly”

- INSEE

France, the Euro zone’s second biggest economy, saw its industrial production remaining flat in February, according to the National Institute of Statistics and Economic Studies. Analysts, however, had expected a 0.1% decline. Measured on the annual basis, industrial output rose 0.6% in the measured month, compared with a revised 0.5% advance in January. In the meantime, manufacturing production was also unchanged, after contracting a revised 0.3% a month earlier, while economists had predicted a 0.6% gain. March’s manufacturing data from France showed the ongoing slowdown in the sector. The final manufacturing PMI came in at 48.8 in Mach, compared with the flash print of 48.2 and better than the final 47.6 seen in February.

Meanwhile, in Spain industrial production rose recovering from a slowdown in January. Measured on a non-seasonally adjusted basis, industrial output rose 1.1% on year in February, after reporting a 2% drop a month earlier. However, industrial output increased 0.6% during February on a seasonally adjusted annual basis compared to the preceding month's 0.4% rise. Analysts had predicted a 0.1% uptick. Last week data showed that Spain's manufacturing sector kept a resilient pace of growth in March and remained comfortably in expansion territory. The manufacturing PMI reached 54.3 in March, after the 54.2 recorded in February.

USD

“I expect that, unless incoming economic reports diverge substantially from projections, the case for raising rates will remain strong at the June meeting”

-Jeffrey Lacker, President of Federal Reserve Bank of Richmond

Janet Yellen, Fed Chairwoman, has found herself in a difficult situation, as a gap in views on a timing of the first interest rate hike in almost a decade continues to widen. The US central bank has been divided into two parts, with some policy makers insisting on lift-off in the federal funds rate already in June, while others believe the Fed should keep rates near zero until the second half of next year. This divergence in opinions makes it difficult for Yellen to navigate the monetary policy in the world’s number one economy. One of the sticklers for a rate hike this summer is Federal Reserve Bank of Richmond President Jeffrey Lacker, who said last week that there is still a strong case for the US central bank to begin raising interest rates in June, as the recent soft economic data will probably prove temporary. At the same time, the President of the Minneapolis Fed Narayana Kocherlakota argued that the Fed should maintain rate on hold until the middle of next year to help the US economy fully recover from the Great Recession.

In March, the FOMC dropped a pledge to be “patient” as it considered the first rate hike since 2006, while Fed Chair Janet Yellen said borrowing costs would probably be increased gradually. Among market participants, expectations for the first increase have been pushed back. A majority of economists forecast the first rate rise at the Fed’s September meeting.

GBP

“It is too early to be highly pessimistic”

- Simon Wells, an economist with HSBC

Industrial production in Britain barely grew in February, as a rise in manufacturing activity was outweighed by a decline in oil and gas. Industrial output climbed 0.1% as energy output fell 3.8%, according to the Office for National Statistics, below a 0.3% increase expected by analysts. The data suggest the industrial sector faltered in the beginning of the year, with output in the three months through February inching up just 0.2%. Meanwhile, the UK manufacturing production rose 0.4% in the reported month, with gains in seven of the 13 manufacturing sub-sectors. The largest contributor was the manufacture of transport equipment, which climbed 1.6% on the month, whereas the area with the biggest drop was the manufacture of basic pharmaceutical products. In addition to that, British building activity continued to slow in February, with construction output unexpectedly falling 0.9% in the reported month. Measured on an annual basis, building industry contracted 1.3%, marking the second consecutive annual decline in construction industry growth.

The recent data suggests Britain's economic growth probably slowed in early 2015, potentially adding to challenges for Prime Minister David Cameron to persuade voters to grant his party power to run the economy.

CNY

“Although inflation is likely to remain in positive territory, a further fall would be consistent with our forecast that the People's Bank of China will carry out additional policy easing this quarter partly in response to deflation fears”

- Julian Evans-Pritchard, China economist at Capital Economics

China’s consumer inflation remained steady in March, showing little sign that the Chinese government’s easing measures to date have considerably cut worrisome deflationary pressure. Cost of living in the world’s second largest economy climbed 1.4% on year in March, beating expectations for a 1.3% increase and following the 1.4% rise in the preceding month. Nevertheless, wholesale prices remained entrenched in deflation, with the producer price index falling 4.6% in March.

A precipitous decline in global oil prices, sluggish consumption and a slowdown in the property sector have pushed prices lower in recent months, even as the Chinese economy braces for slower growth this year. China’s officials last month set a growth goal of around 7% for this year. The world’s second biggest economy expanded 7.4% in 2014, the slowest pace in 24 years. Meanwhile, the consumer price index target was set at around 3% for this year. Annual consumer inflation was 2% in 2014, significantly below the government's inflation goal of 3.5%. In a bid to underpin slowing economy, the People's Bank of China has injected monetary stimulus three times since November, introducing two interest rate cuts and reducing the reserve requirements of major banks.