Afternoon analysis 01.02.2018

Despite the hawkish statement from the Federal Reserve, the dollar remained weak. A significant market sentiment deterioration may be a burden for the zloty. Tomorrow's report on the US labour market will determine both the dollar and the zloty's exchange rate.

Will sentiment deterioration depreciate the zloty?

In the afternoon, a worsening of the market's sentiment was observed. Yesterday, after a two-day meeting of the Federal Open Market Committee (FOMC), the Federal Reserve's statement increased the probability that the monetary policy in the eurozone may also be tightened. As a result, the yields of 10-year-old Bunds (German Treasury bonds) have now reached their highest level in just over two years.

The potentially higher cost of credit may be a burden for the companies' profits and for the equity market. Just before 3:00 p.m., the market’s price depreciation was noticed by the main index, DAX, and fell by more than 1.5% in relation to the lowest level in nearly a month (under 13k points). Futures for the US indexes were also losing at about 0.5%, suggesting the beginning of quotations below in red.

The market sentiment's deterioration could also influence the zloty, although the negative impact has been limited by the still weak dollar. The EUR/PLN quotations rose from 4.15 (morning levels) to 4.16 (around 3:00 p.m.). However, this is still a relatively narrow volatility range, which was observed recently. The zloty's value in relation to the pound, the euro and the dollar was also relatively stable despite the aforementioned sentiment deterioration.

Meanwhile, macroeconomic data from the US economy has been published and appeared to be relatively positive for the dollar. The number of initial jobless claims submitted last week amounted to 230k, while 8k more was expected. This is the second lowest result in nearly two months (before two weeks we observed new, 44-year lows of 216k).

A higher-than-expected reading of unit production costs in the US in Q4 also turned out to be higher than expected. The market consensus assumed an increase of 0.9% per quarter, and data from the Bureau of Labor Statistics (BLS) showed an increase of 2% which is the highest level in six months, which could suggest a slightly higher inflationary pressure. However, this data is subject to relatively large fluctuations, so its impact on the dollar's quotation was limited. Moreover, in Q4, labour productivity in the non-farm sector turned out to be lower than expected - decreasing by 0.1% compared to the previous quarter, while the expected increase was at 0.8%.

As a result, the dollar remained under pressure. The main currency pair's quotations oscillated around 1.245. Perhaps the still-weak dollar protected the zloty from further losses. However, this may change tomorrow when the US labour market report will be published. If wage data exceed market expectations (even slightly), the dollar may be subject to significant appreciation and the zloty may lose its recent gains.

Tomorrow's preview

The most important data of this week will likely be the US Department of Labor. This will be published tomorrow and will release January's report on the labour market. It will present the employment and unemployment rate and labour force resources. However, the most important part will be on changes in employment and average hourly wages.

Wednesday's ADP report indicated an increase in employment by 234k in the non-farm sector which is nearly 50k more than market expectations. ADP data often deviates from the Department of Labour's official data. However, if tomorrow's report confirms this high increase in employment, it may be a positive sign for the dollar.

Even more important information may be the wage data, as it may exert considerable inflationary pressure. Yesterday's Federal Reserve statement indicated that the Federal Reserve expects inflation to increase this year to the 2% inflation target (previously expected to be lower). If the wage data exceeds the market consensus by 2.7% per year and 0.3% per month, a significant appreciation of the dollar and pressure on currencies of emerging countries, including the zloty, may be observed.