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Euro Falls on Data Misses, ECB, BOE and BOJ Stand Pat

This is a summary for the forex trading week ending Friday, August 8th 2014. The Euro ended the week mostly unchanged, losing ground in the first half but clawing back gains in the second. Several major central banks delivered their monetary policy decisions during the past 7 days but none made any changes in interest rates.

Euro Falls as German Factory Orders, Italian GDP Disappoint

The week didn’t start well for Europe’s single currency. The pair lost 96 pips against the US dollar in the first three days, hitting a low of 1.3333 on Wednesday. On Monday, the Spanish unemployment figures came in worse then expected. The market was looking for a decrease of 116,000 in the number of unemployed people but data showed that during July, the ranks of the unemployed only went down by 29,800. 1) Tuesday’s Spanish data came in slightly better then expected however, The Spanish Services PMI printed at 56.2 vs a 55.1 median forecast. The Italian Services PMI, released 30 mins after, came in at 52.8. Market participants were gunning for a 53.2 figure. The European Retail Sales for June came in spot on the 0.4% analyst estimate, beating last month’s 0.3 percent growth in sales. 2) Wednesday was awful for EU data. The German Factory Orders significantly missed the +0.5 percent forecast by printing at 3.2% in the red. 3) Later in the day, the Italian second quarter GDP disappointed by coming in at – 0.2% and the country unexpectedly slid back in recession. 4) The awful data continued on Thursday when the German Industrial Production for the month of June printed at just + 0.3%, missing the + 1.4% analyst forecasts.

ECB Stands Pat Despite Weak Data

The European Central Bank kept rates at the 0.15% level despite data misses earlier in the week. The interest rate for the marginal lending facility was also kept constant at 0.4% and the deposit facility rate will remain at -0.10%5) The press conference by the President of the ECB, Mario Draghi, was without major surprises. The President told reporters that the actions taken by the ECB back in June are giving some results in the interest rate and liquidity but not in terms of inflation. Draghi added that short-term inflationary expectations have declined. A new moment is his statement that the Bank has hired a consultant to design an ABS purchase programme (quantitative easing program). This has been done with the expectation of using it but no final decision has been taken on the matter as of yet. The EUR/USD had a volatile reaction to the press, the pair first fell 17 pips, then rallied from 1.3353 to a high of 1.3392 only to fall back down again in the next 2 hours. By the end of the day, the Euro closed at 1.3363, 19 pips lower compared to its open.

Dollar Gains in a Slow News Week

The US Dollar gained 36 pips against the Aussie, 60 pips versus the Pound and 23 pips against the Euro last week. The small gains came in a slow week for US data. On Tuesday, the ISM Non-Manufacturing PMI for the month of July increased to 58.7 from 56. 6) The Factory Orders for June, released at the same time also increased, completely reversing last month’s loss of 0.6% by coming in at +1.1%. 7) The numbers also beat the 0.6% analyst forecasts. The good US data continued on Wednesday when the Trade Balance printed a deficit of 44 Billion USD, slightly below the 45 Billion recorded in the month prior. The Unemployment Claims on Thursday added fuel to the USD fire by coming in at 289,000, below the 305,000 median forecast (a lower number is positive for the US economy). 8) Interestingly enough, the 4 week average, a less volatile measure of the Weekly claims, dropped to 293,500. This is the lowest the WC have been since February of 2006 and is yet another sign of the improving US economy.

Tensions in Ukraine and Iraq may help the US Dollar

Things are getting more complicated in Ukraine. Government forces have surrounded the rebel stronghold of Donetsk and cut it off from the east, thereby preventing further reinforcements from Russia. 9) With the prospect of losing the rebellion, Putin is now asking for an ‘’aid convoy’’ to be sent to the country’s East. An interesting article in Mashable also claims that the Russians are painting MC on their tanks (meaning peace keeper in Russian). In addition, the EU and Russia and getting closer to a trade war. After sanctions imposed by the bloc earlier in the week, Putin responded by singing a decree restricting imports of food and agricultural products from countries that have imposed sanctions against Russia. 10)

Things are escalating in Iraq as well. The Islamic State (formerly known as ISIS) made lightning gains toward the Kurdish capital of Erbil. The move left some 40,000 civilians stuck on mount Sinjar. As a response, the US, Turkey and other NATO members started air strikes against the militants, along with airdrops of supplies. Not long after the air strikes started, it was reported that Kurdish forces managed to shelter 20,000 of the stranded into their territory. The US Dollar tends to gain during times of uncertainty. With an increasing prospect of a trade war between the EU and Russia, the single currency may lose ground against the USD in the coming months (or weeks, depending on how fast the situation in Ukraine develops).

Aussie Falls on Employment Figures

The Aussie lost 32 pips against the Dollar and a sizable 76 pips versus the Yen in the past five trading days. Data in the first part of the week for decent. On Sunday (early Monday for Europe) the Retail Sales for the month of June grew by 0.6%, double the 0.3% median forecast. 11) Later in the day the country’s Trade Balance improved, the figures for June showed a shortfall of -1.68 Billion AUD, slightly better then the 2 Billion analyst estimate. The Reserve Bank of Australia meeting on Tuesday proved to be a non-event. The central bank left rates unchanged at the 2.5% level, meeting analyst forecasts.

The real data mover was the Employment Change report. Figures for July showed that the number of employed people during the previous month decreased by 300 on a seasonally adjusted basis. 12) In addition, the country’s employment rate skyrocketed, jumping from 6% to 6.4 percent. The data sent the Australian currency in a free fall. The AUD/USD lost 27 pips in the first minute and a massive 50 pips by the end of the hour. But the losses for the Aussie didn’t stop here, the currency pair hit a low of 0.9258 in the next few hours on Thursday, a move of 90 pips from its pre-release price. The extended move on Friday sent prices to 0.9238 but by the end of the day (and week) the currency pair retraced somewhat to closeout at 0.9277.

More Losses for Cable

Cable had another losing week. The Pound lost 51 pips against the USD, 135 pips versus the Japanese Yen and 17 pips against a weak Euro. For the GBP/USD this is now the 5th losing week in a row. The currency pair has been in a free fall since reaching a high of 1.7191 and has so far clocked losses in excess of 400 pips from the high. The Pound closed at 1.6777 on Friday. The data didn’t look as bad as the charts however. On Monday the Construction PMI published by Markit printed at 56.4, beating the 56.1 estimate. 13) The figure was slightly lower compared to last month’s 56.2. On Tuesday the Services PMI also gained more then economists forecasted, at 59.1 vs 58.1. 14) Markit Economics reported that activity in the Services sector has risen at a stronger pace, with new business increasing substantially as demand for services remains strong. The payroll numbers continue to rise ‘’markedly’’, the press release says.

The good news for the UK economy continued on Wednesday with the Halifax House Price Index. The data showed that house prices increased by 1.4% compared to last month. 15) The seasonally adjusted annual change in prices is now at sizeable 10.2 percent with the average home priced in at 186,322 pounds. While supply remains low, housing demand continues to be supported by the economic recovery and growth in employment, the report reads. A bit later in the day, the Manufacturing Production for the month of July printed a gain of only 0.3 percent, missing the 0.7% analyst forecast. 16) The key takeaways from the report are that the largest contribution to the quarterly growth in production came from electricity, gas, and air conditioning output, these areas increased by 4.4% in July. In contrast, the manufacturing components that contributed to the increase between May 2014 and June 2014 were transport equipment, metal and food products, as well as beverages and tobacco.

BOE Stands Pat, Pound Down Slightly

The Bank of England decided to keep monetary policy unchanged at their meeting held on August 7th. 17) The Bank didn’t issue a statement after its two-day meeting so investors will have to wait two weeks for the minutes to find out if any members of the MPC voted in favor of raising rates. The BOE has left interest rates unchanged since March 2009. In addition, the Bank hasn’t made any changes to its Asset Purchases Program in two years.

The UK currency wasn’t impressed by the Bank’s lack of action. The GBP/USD fell by 10 pips in the first minute after the decision was made public. By the end of the day, Cable was trading at 1.6832, 24 pips lower compared to its pre-BOE price point. The UK’s Trade Balance on Friday continued the negative trend, coming in at -9.4 billion Pounds. Market participants were gunning for a 8.9 billion shortfall. As expected, the GBP/USD continued the move lower on Friday and closed off the week at 1.6777.

Yen Gains, Bank of Japan Keeps Policy Unchanged

The Japanese currency gained 48 pips versus the US Dollar last week. The USD/JPY opened on Sunday at 102.54. After a small rally to 102.92, the currency pair fell and by the end of the week was seen quoted at 102.06. Late on Sunday (or early Monday for our European readers) the Japanese Monetary Base came in at 42.7% year on year, slightly ‘’beating’’ the 41.2% median estimate. Continuing the world trend of falling interest rates, the Japanese 10 year Bond Auction on Monday fetched a rate of only 0.52% on an annualized basis, with a bid to cover ratio of 4.3. Just for comparison sake, the previous auction had an interest rate of 0.56% with a smaller bid/cover ratio of 3.4. Generally good demand for a country’s bonds translates into stronger currency, although as usual in financial markets, this rule cannot be counted on all the time. On Thursday the Current Account figures showed that the Japanese Payments Balance during July was a positive 130 Billion Yen (around 1.3 billion USD). 18) Analysts were predicting a slightly lower surplus of 110 billion.

Later in the day, the Bank of Japan delivered its latest monetary policy call. The statement had no surprises, the Bank chose to stand pat and keep policy unchanged. 19) The Bank kept its pledge to increase the monetary base by 60-70 trillion yen ($580-690 billion) per year. At a press conference few hours after the statement, BOJ Governor Kuroda said that exports and output have been weakening but quickly added that a positive economic cycle remains in place. While the Governor admitted that geopolitical tensions in Ukraine are weighing on investor sentiment, he thinks that growth in China and the USA will help exports recover going forward.

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