Afternoon analysis 05.07.2017

05.07.2017 15:36|Bartosz Grejner

The dollar strengthened before FOMC’s minutes. Chances for the euro to gain were lowered after Benoît Cœuré’s comments. The appreciation of the US currency didn’t help the zloty which remained under pressure.

Cœuré weakened the euro

Eurostat said in a report today that retail sales in both the eurozone and the whole EU rose in May by 2.6% compared to the same month a year ago, while a reading 0.3 percentage points lower was expected. The growth rate has been gradually increasing since January after it fell to 1.2% year-over-year in December (from 2.5% a month earlier).

Non-food products noted the highest increase in sales - by 3.5% YOY, while food, alcohol and tobacco rose by 2.1% YOY. Taking into account all EU countries, sales in this category rose by only 1.7% in a similar time frame. The volume in total retail trade increased the most in Romania (by 14%), Slovakia (by 7.9%) and in Ireland and Slovenia (by 7.7%). Higher than expected retail sales could suggest a slightly higher GDP growth rate, which in theory is positive for the euro, however, the market reaction was limited.

A more prominent reaction was visible after Bloomberg reported that Benoît Cœuré, a member of the European Central Bank, said that the Governing Council hasn’t discussed policy changes. His comments decrease the probability that tomorrow’s ECB last meeting’s account could have a hawkish tone, which some of the investors probably counted on.

The EUR/USD pair fell from approx. 1.137 to 1.131. This improved the condition of the dollar which continued the recent appreciation trend. Its value against the yen climbed to the highest level since 16th May (approx.113.7), which in turn caused the dollar’s index to move up above 96 points, the most in a week.

Złoty was weaker

The Polish currency remained today under pressure. The aforementioned Benoît Cœuré comments, which weakened the euro, haven’t even caused the euro to lose substantially against the zloty. The EUR/PLN pair oscillated around the 4.25 level, close to the upper boundary of the trading range in the last two and a half months. The dollar was priced at 3.75 PLN, some 5 gr more than 5 days ago. Additionally, the weakness of the Polish currency was seen in relation to the Hungarian forint – its value dropped to the lowest level in three months.

The current market trend suggests that the zloty could weaken even further. The most important event for the zloty today will be the publication of FOMC’s minutes from the last meeting (at 8 p.m. CET). Should they turn out to be relatively hawkish and bring about a further increase in US treasury yields, the Polish currency could be subject to even greater pressure.

Tomorrow’s preview

Tomorrow’s most important event will also be the publication of “minutes”, this time from the last ECB meeting. The euro has been quite volatile in the last seven days due to somewhat mixed signals coming from the ECB. Last week, Mario Draghi, the president of the ECB, brought about very strong appreciation of the euro with his hawkish comments, which also suggested that the minutes could point towards a faster than expected tightening of the monetary policy in the euro area.

On the other hand, today’s comments by Benoît Cœuré reduce this potentially positive scenario for the euro. Around the publication time, at 1.30 p.m. CET, a significant increase in volatility should be expected. Shortly after that, ADP will publish its nonfarm payrolls data. Although the official data from the Department of Labor will come a day after, ADP’s report could add some volatility to the dollar as well, especially should it deviate from the market expectations. The current consensus points to an 185k increase in June, compared to 253k a month earlier.

 


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