Afternoon analysis 02.08.2017

Mixed data from the US without a major impact on the dollar. The Polish currency was in a relatively weak condition, however, has still been protected by external factors.

New EUR/USD records

ADP published today the nonfarm payrolls reports which showed that employment in the private sector rose by 178k in July, which was 12k below market expectations. However, the previous month’s data was revised upwards from 158k to 191k. In July, employment decreased only in manufacturing – by 4k. On the other hand, it increased the most in the services sector – by 174k. The employment in the whole goods-producing sector increased by merely 4k.

The data was somewhat mixed and its influence on the dollar was limited. It could also be due to a weak correlation to the official Department of Labor data and to the fact that the ADP reading was close to the consensus for the DoL reading (180k).

The dollar remained still under heavy pressure – yesterday’s inflation data failed to improve its valuation. The EUR/USD pair traded today above 1.18 – it even increased in the morning hours to the highest level since mid-January 2015. One euro was worth as much as 1.187 dollars. Its valuation won’t probably change much until the Friday’s labour market report, around which we should expect significant volatility.

CHF/PLN tested 3.70

We’ve been reminding in our recent comments that the Polish currency has been relatively weak as of late, mainly due to local political factors. Its weakness has especially been visible in relation to the Hungarian forint or the euro. The PLN/HUF pair remained close to five-month lows.

On the other hand, the slumping dollar’s value and a good condition of the eurozone protect the zloty from more substantial declines. Additionally, the global weakness of the Swiss franc caused the franc to mark new lows to the zloty since releasing the peg to the euro by the SNB. The CHF/PLN tested today the 3.70 boundary – it was only approx. 15 gr more than before SNB’s decision.

Tomorrow’s preview

Tomorrow’s Bank of England’s decision regarding the monetary policy will be one of the more important events this week and probably the most important for the pound (due to be released at 1 p.m.). changes to the interest rate level and bond buying program are not expected, although the number of monetary committee’s members voting in favour of a rate hike could be significant.

At the previous meeting of the committee, three members unexpectedly voted in favour of a rate increase (although only one vote “for” was expected). The market consensus currently points toward two members casting such a vote.

Minutes of the meeting will also be shared together with the decision. Although inflation cooled down a bit in the last month, there were some relatively positive data in the meantime which suggested a fairly good condition of the British economy and its resilience to the Brexit process (e.g. labour market report, manufacturing PMI).

Potential suggestions by the committees' members of a rate hike due to the relatively positive state of the British economy and/or a still high level of inflation pressure could strengthen the pound. On the other hand, the lack of such suggestions could let down investors and, in effect, weaken the British currency.

The non-manufacturing ISM data (to be published at 4 p.m.) could prove important for the dollar. The US currency remains under significant pressure – its value in relation to the euro fell to the lowest level since January 2015, despite better than expected inflation readings.

However, political factors have recently been contributing to the dollar’s weakness – yesterday’s marginally lower than expected manufacturing ISM reading didn’t help either. Hence, a similar index for the non-manufacturing sector could potentially cause more volatility in the dollar, especially in the case of deviating from the market consensus (57 pts).

Looking at recent months the chances for such a scenario seem limited: apart from the March reading of 55.2 pts, the activity in the sector according to the ISM index was in a very narrow range between 56.5 pts and 57.5 pts.