Afternoon analysis 06.09.2017

06.09.2017 15:54|Bartosz Grejner

Minor changes in the main currencies’ valuation - the market is waiting for the ECB. The MPC leaves interest rates unchanged in Poland - no significant changes in zloty quotations.

EUR/USD pair still above 1.19 boundary

The calendar of scheduled events for today was relatively limited. The absence of significant publications has made the currency market volatility relatively small today. Investors are most likely waiting for tomorrow's information from the European Central Bank. Significant changes in the foreign exchange market may, therefore, be expected tomorrow.

The EUR/USD pair traded at approx. ​​1.193 before 3 p.m., just above the upper boundary of this week. Data on industry orders in Germany from Destatis had very limited impact on the exchange rate of this currency pair - orders decreased by 0.7% in July in comparison to last month and were by 1 percentage point below expectations. They also have noted the first monthly fall since April.

In turn, today the Bureau of Economic Analysis (BEA) reported that the deficit in the US international trade in goods and services balance increased by 0.2 billion USD to 43.7 billion USD in July, although it was still 0.9 billion lower than indicated by the median expectations. A significant decline was recorded in oil imports, which fell by 0.95 billion USD, as well as in passenger cars, by 0.83 billion USD.

Later in the day (at 4 p.m.), August's ISM data from the US service sector will be published. A month earlier, it unexpectedly dropped to the lowest level since August 2016, mainly due to a decrease in the component of orders in this sector (by 5.4 points). The market consensus assumes an increase in the headline index to 55.4 pts.

If this index failed market expectations and turned out to be below this value, the dollar could incur losses and the EUR/USD rise towards the 1.20 boundary. The potential for movements, however, seems to be limited due to tomorrow's ECB meeting, which is likely to stop market participants from making any major changes at the moment.

Slight changes on the zloty

Minor changes in the FX market have also caused slight changes in the zloty's valuation relative to the main currencies. In turn, the Monetary Policy Council kept expectations about interest rates unchanged as expected. At 4 p.m. a message on this will be published, and a press conference will start.

Although there has still been a visible absence of inflationary pressure, which could justify faster interest highs, good economic conditions and positive labour market developments may prompt some members of the MPC to consider raising rates. Such suggestions could strengthen the zloty.

However, on the one hand, the likelihood of such suggestions seem to be limited and tomorrow's ECB's statement and conference may impact the zloty’s valuation more significantly.

Tomorrow's preview

The most important event of tomorrow will be the statement (at 1.45 p.m.) and the press conference (at 2.30 p.m.) from the European Central Bank after the Governing Council meeting. A change in monetary policy is not expected. However, given the recent euro's appreciation and the expression of fears by the Governing Council, i.e. in the minutes from the previous meeting, another discussion over the exchange rate seems to be possible.

Despite the good economic situation in the eurozone and gradually increasing inflation, it has continued to deviate from the target set by the ECB (2%). On the other hand, the strong euro may hamper the return of inflation into its target. In addition, the pace of price rises in the US is currently being suppressed, which makes the probability of further increases limited.

The current dollar's weakness has been causing the euro's appreciation, which is not in favour of the ECB. For some time there have been speculations that the improving economic situation of the eurozone and the rising inflation may convince the ECB to reduce the QE tapering from early 2018. Such a decision would probably strengthen the euro, which in the present situation would not be the desired result.

The Governing Council can, therefore, verbally intervene in order to reduce the exchange rate of the single currency area, although it is not included in the mandate of its monetary policy. It is also possible that the decision to limit the bond-buying program may be slightly postponed, so as not to put additional pressure on the euro's strengthening.

If such suggestions were made in the statement or during Mario Draghi's conference (the President of the ECB), the euro could incur some losses. The probability of deeper depreciation seems to be limited due to the good economic situation in the eurozone which has been supporting the single currency area. Therefore, we may expect increased fluctuations in the hours of the aforementioned events.

 


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