Afternoon analysis 03.07.2017

The dollar made up some of the losses before Independence Day. Slightly worse sentiment towards the Polish currency could be observed, although significant price movements are yet to come.

Dollar’s rebound

Eurostat published today a report in which it said that the unemployment rate in the eurozone stood at 9.3% in June, and while it was 0.1 percentage point above expectations, maintaining the similar level as in the previous month meant that it was still at the lowest level for eight years. However, the rate for the whole European Union was at 7.8% still lower. Its lowest level was observed in the Czech Republic (3%), while the highest in Greece (22.5% - March data). Poland, with an unemployment rate at 4.8%, was sixth in the EU.

The Eurostat’s report showed some interesting data regarding the unemployment of youths (under 25 years). The rate was lowest in Germany (6.7%) - Europe’s largest economy which recent condition has been one of the best in the EU. However, the highest unemployment of youths was noted in countries burdened with economic problems such as in Greece (22.5% - data from March), Spain (38.6%), Italy (37%) or Portugal (24%).

The rate of unemployment among people under 25 years old in Poland was 14.1% in May, and was still slightly higher than in April (14.0%), a positive trend (similar to the general unemployment rate) could be observed. A year ago it was as high as 18%.

Eurostat’s data, as the PMI indexes, had very little impact on the euro. Since the early morning we have been noting appreciation on the US currency which translated into a gradual fall of the EUR/USD pair to 1.136, while it was 1.145 only on Friday.The USD/JPY pair also gained visibly and crossed the 113 barrier to reach the highest level since 17th May.

The dollar’s appreciation today could be a combination of a recovery of recent rapid decreases in value (and profit taking) and apprehension of some investors relating to Wednesday’s publication of FOMC’s minutes. Additionally, the US Department of Labor will publish a report on the labour market in June. Should it show an increase in solid average hourly earnings (0.3% monthly and above) coupled with a strong nonfarm payrolls increase (above 170k), the dollar could substantially gain in value.

Hence, the current situation of the US currency could reflect a situation in which part of the market tries to price in the risk of relatively hawkish minutes and positive labour market report. We expect the dollar to be quite volatile around the time of both publications.

Zloty was weaker after PMI data

The PMI manufacturing index in June in Poland, which was published at 9 a.m. CET, missed the market’s expectations (53.1 pts vs. 53.7 pts), although it was still higher than a month ago (52.7 pts). The report itself was relatively optimistic, however, pointed out a slowdown in employment growth, which was the slowest in nearly three years.

A globally stronger dollar together with worse than expected PMI data caused the dollar’s price to increase in the interbank market to 3.73 PLN, nearly 3 gr more than during the early hours of the Asian session today. Taking into account the recent dollar’s sell-off, the appreciation potential for USD/PLN is relatively high, however, as was noted in the previous paragraphs, the highest volatility could be expected on Wednesday and Friday.

Tomorrow’s preview

The trading volume could be limited tomorrow due to the absence of most US investors who will be celebrating the US Independence Day. On one hand, this could mean a relatively calm day in the market, however, on the other hand, it could also cause the market to be more susceptible to unexpected events and information as the liquidity will be lower.

IHS Markit will publish at 10.30 a.m. CET the UK’s construction PMI in June. The pound has lost value after a weaker than expected manufacturing PMI reading (the lowest level in three months). Although the market consensus points toward the index falling from 56 pts to 55 pts in June, a lower reading than that could push the pound’s value even lower.

Peter Praet, chief economist at the European Central Bank, will give a speech during a panel discussion at "The Fixed Income Market Colloquium" in Rome at 2.30 p.m. CET. Taking into account the recent rapid appreciation of the euro caused by Mario Draghi’s comments, Praet’s speech could be particularly analyzed by investors.

The upward trend seems to have faltered – even better than expected PMI data for the eurozone haven’t lent support. Praet, should he address issues regarding future interest rates and/or the asset purchase program, could significantly increase the euro’s volatility.