Afternoon analysis 06.07.2017

06.07.2017 15:38|Bartosz Grejner

The euro strengthened slightly today but the ECB’s minutes were without hawkish surprises. Worse than expected employment data weakened the dollar. The Polish currency was somewhat weaker, although it could be subject to more substantial changes tomorrow.

Dollar still under pressure

Today, the European Central Bank published the minutes on the last policy meeting of the Governing Council. After the publication, the euro gained slightly against the dollar – the EUR/USD moved higher (from 1.136 to 1.139) over the next 30 minutes. The ECB minutes showed that the Council was particularly satisfied and upbeat about the economic growth (hence the recent upward revision to its projections), however, the inflation pressure remains subdued.

The Governing Council added that the recent downward revision of its inflation projections concerned the main index and that projections for the core index without energy and food prices remained the same. It was also underlined that adverse scenarios for lower inflation became less likely, although a positive trend was yet to be seen and accommodative policy was still needed to drive inflation toward the 2% target level. It seems that the aforementioned slight strengthening of the euro was due to the Council stating that negative scenarios for the inflation were less likely and maintaining the core inflation projections remain unchanged.

At 2.15 p.m., the ADP published a report regarding employment in the private sector. It said that employment grew in June by 158k, while 185k was expected. The services sector was fully responsible for all of June’s increase, while in the goods-producing sector the increase by 6k in manufacturing was offset by a decrease in natural resources/mining by 4k and in construction by 2k. The dollar’s initial reaction was negative and the EUR/USD pair closed in on 1.14. The ADP data and the Department of Labor official data (published tomorrow) have diverged, hence a stronger reaction should be expected tomorrow.

Zloty was also waiting for the US labor market report

The Polish currency was slightly weaker today after yesterday evening’s gains. The EUR/PLN traded under 4.23 only this morning, although it went as high as 4.25 after midday. The zloty could have been weakened by a worse sentiment on the European stock markets, which main indexes lost approx. 1%. However, the ECB’s minutes, which positively addressed the economic growth in the euro area and US employment data that missed expectations, were also positive for the Polish currency which shouldn’t lose value.

Tomorrow’s preview

Friday could turn out to be quite an important day in the currency market. At 10.30, the Office for National Statistics (ONS) will publish data regarding May’s industrial production in the British economy. During the previous four months, its growth rate was decreasing (compared to the same month of the previous year), and finally showed a decline of 0.8% year-over-year in April. The median market expectations suggest that the industrial production could increase by 0.2% YOY in May, along with its main components: manufacturing production (an increase of 1.0% YOY) and construction (by 1.1% YOY).

The US Department of Labor will share June’s long-awaited labour market report. Investors will focus particularly on data regarding the average hourly earnings and private non-farm payrolls. The Federal Reserve argues that a tightening of the labour market could cause inflation to move higher. This could justify gradual interest rate increases in their view. A substantial increase in the dollar’s volatility should be expected around the time of the publication. Should the aforementioned data miss expectations (especially earnings data that put pressure on inflation), the dollar could remain weakened. However, if the numbers in the report prove to be solid and/or exceed the market consensus, the US currency could post a strong gain which could also negatively impact the Polish zloty.

 


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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