Afternoon analysis 10.07.2017

Better forecasts for economic growth and inflation for the Polish economy. The lack of significant publication influences the quiet start of the week on the currency market, although Japan remains under pressure from ultra-light monetary policy.

Favorable NBP projections for Poland

The National Bank of Poland (NBP) has published a July inflation report, which - compared to the March edition - indicates a slightly lower inflation this year. The NBP forecasts that in 2017 the annual inflation will reach up to 1.9%, although four months ago it was expected to be 2%. It is expected to remain the same in 2018, however its forecast for next year has been revised from 2.3% YoY to 2.5% YoY.

According to the NBP, Poland will develop at faster rate not only this year but in two successive ones too. The GDP growth rate for the years 2017 - 2018 is projected at 4%, 3.5% and 3.3%, respectively, by 0.3 percentage point, 0.2 percentage point respectively. And 0.1 percentage point more than in March.

This is relatively good news for the zloty, as they suggest that monetary tightening may be somewhat faster than expected. This may trigger investors to pay close attention to inflation readings in the Polish economy - if it exceeds expectations, it may suggest a higher probability of the earlier increases of interest rate, which may strengthen the zloty.

The zloty was stable today and the reaction to the inflation report was limited. EUR / PLN pair price moved between 4.23 - 4.24 and USD / PLN 3.70 - 3.72. In the surroundings of the levels from Friday and in relation to the zloty were the pound and the Swiss franc. For the Polish currency, the most important issue this week may be Friday consumer inflation (CPI) in June in the US economy.

If the benchmark (excluding energy and food prices) turned out to be better than expected (above 1.7% y / y), the dollar could be strengthen. The rising yields on US Treasury bonds could cause an outflow of capital from emerging markets, therefore weakening the zloty.

Quiet dollar rating

Friday's mixed labour market report turned out to be relatively neutral for the dollar. The value of Euro against the dollar (EUR / USD) is currently oscillating around the 1.14 level, and today’s lack of significant US news is likely to affect the further stabilization of the Eurodollar. The Dollar Index (DXY) slightly increased just below the 96-point threshold, although it was mainly due to the weakness of the yen against the appreciation of the dollar.

The Japanese currency was the cheapest today against the dollar for two months - the USD / JPY pair reached its highest level in two months (about 114.3) and approached the four-month peak (around 115.5). Their overstepping would mean that the course was heading towards the maxima of the course from last December (about 118.5).

Jen is still under pressure from the mild monetary policy of the Japanese central bank, whose actions (unlimited purchases of bonds and keeping the yields on 10Y Treasury Bonds close to 0%) in the context of US monetary tightening and speculation on the euro zone. Additionally, those actions weaken in this environment the Japanese currency.

Tomorrow on the market

At 14.00, the Central Statistical Office (GUS) will provide final data on consumer inflation in June in the Polish economy. Initial data released on 30 June pointed to an unexpected drop in inflation from 1.9% to 1.5% (consensus assumed 1.8%) on a yearly basis. It was, at the same time, the lowest inflation rate since December when it was up to 0.8% YOY

However, the data is likely to have limited impact on the zloty - this is just another reading, and this has been a global trend in recent months mainly due to the rapidly falling prices of oil. Although, a slightly higher from the initial reading could be seen as increase of the probability of a faster monetary tightening, which would turn up as strengthen of the zloty.

Tomorrow, three members of the US Federal Reserve will be speaking - John C. Williams (without the voting right in the Monetary Committee this year), Lael Brainard and Nael Kashkari. In addition, Benoit Coeure, from the European Central Bank, will be speaking tomorrow at the FX Contact Group. It is unlikely to get valuable comments from Fed members which could cause significant fluctuations in the dollar.

Aftera mixed US labour market report, investors' attention will be primarily focused on further inflation readings and it is likely that they will push through the biggest moves of the dollar in the near future. As for the Coeure statement, although he is unlikely to refer to the ECB's monetary policy, his statement will probably be carefully analyzed by investors and any potential implications for the future of the ECB’s monetary policy could cause a rapid reaction to the euro.