Afternoon analysis 07.09.2017

Monetary policy and the ECB's statement have not changed - but at the press conference, the ECB president was talking about the euro exchange rate and the bond-buying program. The zloty gained on the weaker dollar.

The euro gained despite dovish Draghi

In line with expectations, the European Central Bank (ECB) has left interest rates and bond-buying program unchanged. The accompanying statement also remained unchanged. Even before its publication, the main currency pair, the EUR/USD, traded near the 1.20 boundary but gradually depreciated in the following minutes. Some market participants may have expected a more hawkish statement.

During the later Mario Draghi's press conference, the President of the ECB, was repeatedly mentioned the euro's exchange rate. He pointed out that the euro's rate was discussed at the last meeting and was still relevant for future inflation. He also added that the exchange rate must be taken into account in making decisions by the Board of Governors.

Draghi also said that during the ECB meeting were discussed the size and timeframe of the QE tapering, but that was just a preliminary discussion - he indicated that the decision on this program would likely be taken in October. In relation to the June projection, the economic growth rate was revised from 1.9% YOY to 2.2% YOY. In turn, i.a. by the higher level of the euro exchange rate, the inflation level was revised downward by 0.1 percentage point in 2018 to 1.2% and 2019 to 1.5% in annual terms.

Although the ECB president was very dovish and it is certain that the repeated mentioning about the euro exchange rate was intended to create pressure on the single currency area, the euro was clearly appreciating. The EUR/USD pair exceeded 1.20 boundary which practically equalized the last trading highs of 29 August. However, if the pressure connected with Draghi's dovish message about the impact of the euro's exchange rate on inflation would dominate (for example in connection with the realization of profits) then in the following hours the EUR/USD may fall back below the level of 1.20.

New lows on the USD/PLN pair

During the Mario Draghi press conference, due to the euro's strengthening and the EUR/USD rising above 1.20, the USD/PLN pair has set new lows since mid-May 2015. Less than 1 gr has been missing to reach the lowest level since the end of 2014.

The euro's appreciation has led to a significant increase in the EUR/CHF exchange rate. The weakening of the franc also reflected in its relation to the Polish currency - the CHF/PLN exchange rate fell to 3.70, close to the lower boundary from the last month. A similar scale of depreciation (approx. 0.5%) in relation to the zloty was recorded by the pound. In turn, the euro's value expressed in the Polish zloty was stable at 4.25, close to yesterday's level.

In the following trading hours, the zloty's value may depend on the further development of the euro. If the supply pressure on the EUR/USD outweighs and the exchange rate of this pair starts to fall, strengthening the dollar at the same time, the zloty may lose some of its profits.

Tomorrow's preview

At 8 a.m., Destatis will present July's data on foreign trade in Germany. In June, export fell 2.8% in relation to the previous month, noting the biggest decline since December 2016. However, import fell by 4.5 % in the same period - the most since over 7 years. Thus, the trade surplus of the German economy (seasonally adjusted) rose for the second time in a row to 21.2 billion EUR, the highest level since February.

Now, the consensus assumes an increase in both, the export and the import, although the stronger import could lead to a drop in a surplus of up to 20.3 billion EUR. Although the trade data from the largest economy in the eurozone may affect the euro area and the euro's valuation, tomorrow, its influence may be limited. On the market will most likely be continued the sentiment associated with yesterday's ECB.

At 10.30, the Office for National Statistics (ONS) will present July's data on industrial production in the British economy. After two months of declines (in annual terms), in June the production rate increased by 0.3%. Market consensus points to an increased activity of growth in this sector from 0.3% to 0.4%.

This may be mainly due to accelerated manufacturing production growth, but on the other hand, the slowdown in construction production can slow down the overall production index.

At the same time, the ONS will publish July's data on the trade in goods and services balance. A month earlier, the deficit rose to its highest level since September 2016 and amounted to 12.7 billion GBP. Now, market consensus assumes slightly lower deficit in July, i.e. 11.9 billion GBP.

The pound has been constantly under pressure connected with the Brexit process and may be particularly vulnerable to macroeconomic data from the British economy. As a result, we can expect a significant increase in the pound's fluctuations around the time of the ONS publication, especially if it deviates signifcantly from the consensus.