Afternoon analysis 13.06.2017

The volatility was low today despite better than expected data regarding consumer inflation in Great Britain, producer inflation in the US and economic sentiment in the euro area. The zloty was stable following a core inflation reading that missed expectations.

Small market fluctuations

The Wednesday session on the currency market was relatively calm. The trading range in the case of main currency pairs was fairly limited as well. EUR/USD traded near the 1.12 level, although somewhat better than expected data regarding the eurozone were published. The ZEW economic sentiment reached the highest level in two years, however, the index for Germany slightly missed expectations. In the case of the biggest economy in Europe, the subindex for current conditions increased sharply to the highest level in seven years.

A higher than expected (by 0.2 percentage points) inflation reading wasn’t able to significantly lift the pound. The British currency only slightly gained against the dollar – GBP/USD rose just above 1.27, even though, it could have been the result of a weaker dollar today. The dollar’s index (DXY) declined from 97.2 pts to 97.0 pts. However, in the afternoon session, the US currency could find support in the form of better than expected producer inflation (PPI) data, which were published by the Bureau of Labor Statistics at 2 p.m. CET.

The PPI index rose to 2.4% year-over-year, 0.1 pp above the market consensus. The core index (excl. energy and food prices) also exceeded expectations and rose to 2.1% YOY, topping the highest level since May 2014. Although the data were supportive for the dollar, a potential positive reaction could be limited. Investors could be more focused on tomorrow’s CPI reading and, ultimately, on FOMC’s decision and statement.

Zloty close to morning’s levels

The Polish currency was stable today as the better sentiment proved beneficial. EUR/PLN still traded close to 4.19. The zloty gained slightly against the Hungarian forint (around 0.2%) - PLN/HUF fell below 73.2, close to the lower boundary of last days’ trading. On the other hand, the zloty lost value to the pound – GBP/PLN rose to 4.76. However, it was mainly due to the pound being stronger against the yen and dollar which were both in a slightly weaker condition today.

The National Bank of Poland (NBP) published today the core consumer inflation data for May. The core CPI missed expectations by 0.2 pp and was at 0.8% YOY in May, underlining a slower rise in prices in recent months. This could possibly be an argument for the Monetary Policy Committee to maintain the current dovish monetary policy stance (the MPC chairman doesn’t expect interest rate hikes until the end of 2018).

NBP also published today a report regarding the current account in April. The data showed a deficit of 1.162 billion PLN (275 million euro) which was in line with the median of market expectations, however, the inflow of EU’s funds was still fairly modest. The balance with the EU was +300 million PLN (+71 million euro), however, most of which were funds from the Common Agricultural Policy. The low inflow of funds from the EU could mean a lower than expected investments in the next few months, although, investments, in general, should increase markedly in the second half of the year (due to low investment levels in 2016).

Tomorrow’s preview

Wednesday could prove an important day for the dollar. The Bureau of Labor Statistics (BLS) will publish at 2 p.m. CET a report regarding the consumer price inflation (CPI) in the US economy. Although the CPI data in the context of the US aren’t the most important (the PCE index is - it’s used by the Fed in their inflation projections), it could show the underlying price trends in the economy.

The readings for the recent months suggest that its growth rate visibly faltered. The CPI index was 2.7% in February, however, dropped to 2.2% in April. Possibly a more important core CPI index also fell to 1.9% - the lowest level since 1.9%. The median of market expectations suggest that the price growth slowed down even further to 2% in May. Should the aforementioned core index drop below 1.9%, the dollar could lose value.

Tomorrow’s main event will be, however, FOMC’s decision regarding the interest rates in the US together with the statement (at 8 p.m.) and a press conference by Janet Yellen following it (at 8.30. p.m.). A rate hike by 0.25 bp to 1.25% is widely expected so the more important factor will be the FOMC’s stance on future monetary policy decisions and further rate hikes.

The market consensus points towards two interest rate increases this year, so a strong suggestion from the statement of yet another one (apart from tomorrow’s hike) could cause the dollar to appreciate. On the other hand, should FOMC make a “dovish hike” and underline some possible problems with the economy’s growth and/or inflation growth, the US currency could even ultimately lose value.