Afternoon analysis 01.08.2017

Both, in May and June, core US inflation has been above expectations. However, the dollar's reaction has been limited so far - may have be waiting for data on the activity in the manufacturing sector (ISM). The Polish currency has been still in a worse condition, although, the good situation in the eurozone and the weak dollar have been protecting it from further depreciation.

Good news for the dollar

Today, the Bureau of Economic Analysis (BEA) has announced the anticipated by the investors data about PCE inflation, which has been taken into account by the Federal Reserve in their inflation projections. June's core index (excluding energy and food prices) turned out to be higher in line with market expectations (1.4%) and reached 1.5% compared to the same month last year. The revision of May data from 1.4% to 1.5% has been also positive. A slightly less significant core inflation index has decreased from 1.5% to 1.4% YOY.

From today's BEA report, we have also learned that consumer spending has increased by 0.1% compared to the previous month - and the last month increase was also revised from 0.1% to 0.2%. Slightly worse has been the income dynamics which has missed expectations - it has remained unchanged from the previous month (0.4% growth has been expected). Also, May’s increase was revised down from 0.4% to 0.3%.

The data tone has generally been positive, especially in the case of inflation. However, its impact on the dollar has been very limited (immediately after the publication) - the dollar's exchange rate against the euro or the yen has remained almost unchanged. Moreover, we could observe an increase in the yields on US Treasury bonds, particularly those with longer maturities.

Two issues should be born in mind. The dollar has been currently under the pressure from internal political factors, and by 4.00 p.m. the US ISM manufacturing index will be published. Last month, it rose to the highest level in two and a half years - market estimates have indicated that in July it will fall from 57.8 points to 56.5 points. A deeper decline could undermine the impact of the aforementioned positive inflation data. On the other hand, a reading near the last month’s level or higher would give an additional impulse to the appreciation of the dollar.

The zloty has been in worse condition

Today, a weaker than expected manufacturing PMI reading added up to the local political issues weakening the Polish currency, which also showed the lowest growth rate in the sector since November 2016. The value of the zloty has fallen in relation to most currencies today, although its decline to the Hungarian forint has recently been the most significant. The PLN/HUF pair has reached the lowest level today in five months.

The EUR/PLN has been quoted around 4.26 today - close to the upper limit of the last three months. On the other hand, the USD/PLN has been quoted close to nearly 2-years lows. The Polish currency has been supported by the very weak dollar (and a favourable eurozone condition). If its valuation had been slightly higher, we could have been dealing with a much weaker zloty.

Therefore, the data from the US economy this week could prove important for the zloty- mainly employment change according to ADP, manufacturing ISM index and Friday's labour market report. If it turned out that the data would eventually be positive for the dollar, the Polish currency could be under selling pressure.

Tomorrow’s preview

IHS Markit/CIPS will publish data regarding the construction PMI in Great Britain in July. After today’s better than expected manufacturing PMI, the expectations for a better than expected activity in the construction sector could rise as well.

The median of market expectations points toward a reading of 54.5 pts, which would mean a decrease of 0.3 pts compared to the previous month. Yet another piece of information indicating a better-than-expected condition of the British economy and its relative resilience to the Brexit process could additionally strengthen the pound.

The ADP publication regarding the change in private nonfarm payrolls (to be published at 2.15 p.m.) will probably be the most important planned event for the currency market tomorrow. Investors will certainly look closely at the data as it could give hints to the Friday’s official data from the US Department of Labor, although the difference in readings between the two in the last two months were more than 29k.

Nonetheless, tomorrow’s ADP report will probably increase the dollar’s volatility. A deviation from the consensus (currently at 185k) could bring about significant movements of the US currency’s value. However, an increase in employment between 150k and 200k could ultimately have a relatively small impact on the dollar.