Afternoon analysis 07.06.2017

Reports regarding cuts in inflation projections by the ECB caused EUR/USD to tumble to the 1.12 level. The zloty remained relatively stable today.

EUR/USD at the lowest level since Friday

Today’s session was meant to be a relatively peaceful one, taking into account the lack of important macroeconomic data publications. However, around midday, Bloomberg broke the news that the European Central Bank will present tomorrow, which lowered previous inflation projections. According to the news, the consumer inflation (CPI) in the euro area was projected to be roughly 1.5% in every year between 2017 and 2019.

This information caused a vigorous reaction on the currency market, especially in relation of the euro against the dollar. EUR/USD dropped in a matter of minutes from around 1.127 to 1.12. As a result, USD/JPY also increased from the recent bottom of 109.0 to around 109.5. The dollar’s index (DXY) nearly reached 97 points, the highest level since Friday. The euro lost in value due to investors pricing in maintaining a dovish stance towards the monetary policy by the ECB in the foreseeable future.

There are no more important events planned for today’s afternoon which could potentially further influence today’s trading session. Hence, the market will most probably be further discounting the aforementioned news regarding inflation projections in the context of tomorrow’s ECB’s statement and press conference. The fluctuations could widen due to increased activity of the US investors later in the evening.

Polish currency remained fairly stable

The mentioned inflation projections report caused a relatively substantial reaction on the USD/PLN and GBP/PLN pairs which rose close to the upper boundary of the last few days trading range. However, this trend probably won’t last, if the dollar doesn’t strengthen further. The pound was slightly stronger today due to the upcoming elections (tomorrow). One should expect increased volatility of the British currency in the last two days of the week.

The Polish Monetary Policy Committee said today that it left the interest rate unchanged. The decision was in line with expectations so the statement and press conference due to start at 4 p.m. could prove more important, in theory at least. There is, however, very little chance that the Committee will change anything in its dovish stance. The inflation in recent months visibly slowed down, not only in Poland but in other parts of Europe and the US as well. This should decrease the probability of faster than expected interest rate hikes.

Tomorrow’s preview

The European Central Bank will publish its monetary policy decision at 3.45 p.m.. Although no changes to the interest rates and the asset purchase program are expected, investors attention will be particularly focused on suggestions which could point to a potential end to the aforementioned program.

Comments from ECB members could suggest that raising interest rates is still far in the future and won’t happen before the assets purchase program ends, which is meant to last until the end of 2017 (it could be extended, though).

The press conference with Mario Draghi, the ECB’s chief, will start at 2.30 p.m., during which he may remark about the future of the monetary policy in the euro area. Should his speech suggest a tightening of the monetary policy, the euro could appreciate. Either way, the euro’s increased volatility is to be expected during the decision’s publication and the press conference.

The US Department of Labor will publish at the same time a report regarding the initial jobless claims and insured unemployment. The former slightly disappointed in last week’s report (was the highest in a month) but was still relatively close to 44-year lows from the end of February.

However, the insured unemployment count positively surprised yet another time with a seventh in a row reading below 2 million people, close to recent 29-years lows. Initial jobless claims number around 240k with insured unemployment below 2 million could potentially support the dollar but the problem of the US labour market are the relatively low employment rate and sluggishly rising wages. Hence, the impact of tomorrow’s Department of Labor on the dollar could ultimately prove quite small, even in the case of a solid report.