Afternoon analysis 01.03.2017

The German inflation increased due to increasing energy costs. The American PCE is slightly disappointing, but the dollar’s condition remains positive. The global sentiment supports the zloty and the EUR/PLN is near 4.30.

German inflation

According to Destatis, the German inflation for February was at the level of 2.2% YoY, which was better than expected. The energy prices increased 7.2% YoY. Moreover, food prices increased 4.4% YoY.

However, this result wasn’t anything unexpected. Recently, the raw material prices have been increasing rapidly, which translated to the general CPI growth. Baseline inflation remains stable. Therefore, the marker reaction was limited. The euro remains under pressure of the stronger dollar, as well as the presidential elections in France.

Disappointing PCE

Today, the Bureau of Economic Analysis (BEA) published the American PCE for January, which increased 1.7% YoY. This was worse than expected (1.8%). This reading is significant, because the Federal Reserve uses this data for its inflation forecasts.

After hawkish comments from William Dudley yesterday, the market expected a positive PCE reading. However, despite a slightly worse result, the market reaction was positive. Profitability of the American two-year bonds reached the level of 1.3%, which was their highest in eight years.

This caused that the dollar’s condition was positive. The EUR/USD increased approximately 0.5% (slightly above 1.05). Moreover, the GBP/USD was pushed to the 1.23 level. Eventually, the dollar’s index bounced to the level of 102 points.

Stronger zloty

The zloty strengthened this afternoon. The EUR/PLN went to the level of approximately 4.2950. A similar situation was observed on the CHF/PLN, which went down to 4.03. The zloty increased significantly against the weaker pound and the GBP/PLN was pushed to the level of 5.02. However, the zloty lost against the dollar, due to yesterday’s comments from William Dudley in his interview with CNN. The USD/PLN increased to the level of approximately 4.08.

If this upward trend on the dollar continues, we may expect the USD/PLN to go above the 4.10 level. However, the EUR/PLN should remain near the 4.30 level, due to a mild monetary policy of the European Central Bank. Moreover, if the Polish economy remains in a positive condition, the zloty may stabilize at the level of 4.25.

Tomorrow’s events

At 10.30, CIPS/Markit will reveal the data regarding the British building sector PMI for February. This index had been gradually increasing in August and its reading for December was at its highest level since March (54.2 points). However, it quoted a decline in January (52.2 points, which is also the market consensus for February.) Recently, the pound has been sensitive to the macroeconomic data. Nevertheless, today’s negative industrial PMI had a minor impact on the British currency. Therefore, we may expect that tomorrow’s reaction will not be intense.

At 11.00, Eurostat will publish the euro zone’s inflation data for February. This index has been in an upward trend since mid-2016. It’s recent growths were mainly related to an increase in the raw material prices. Inflation was at the level of 0.6% YoY, 1.1% and 1.8% in November, December and January, respectively. Currently, the market consensus is at the level of 2%. However, baseline inflation has been remaining at a stable level for two years and has not been showing upward tendencies. Baseline inflation is estimated to remain at the level of 0.9% YoY in February. Even though this data is significant for the euro zone’s economy, it should have a relatively limited impact on the euro.

At 14.30, the American Labor Department will publish the jobless claims index. This index has been gradually increasing over the past three weeks (244k previously). Currently, the market consensus is at the level of 243k, which would still be near the forty-year minimum (233k). Therefore, this reading should not have a large impact on the dollar. The market will most likely be dominated by the sentiment related to the monetary tightening, as well as to the fiscal stimulation.