Afternoon analysis 13.07.2017

Mixed data from the US didn’t lend support to a weakened dollar. However, such support was given to the euro - there has been speculation that the European Central Bank could start gradually winding down the asset purchase program as soon as next year. The zloty remained stable, although conditions may favour its appreciation.

Euro gets support

The main currency pair, the euro against the dollar, have recently undergone relatively large fluctuations. Even yesterday, the EUR/USD approached the 1.15 level, while today around 1 p.m., it fell to the 1.137 level. However, additional support for the euro was provided by The Wall Street Journal.

Mario Draghi, the president of the European Central Bank, is due to announce the gradual winding down of the bond-buying program starting next year after the monetary committee meets in September. The ECB could be motivated by the improving situation in the eurozone. This information slightly strengthened the euro, which in relation to the US currency returned above the 1.14 level.

At 2.00 p.m. we will learn June's producer inflation data (PPI) and a report on last week's US initial jobless claims and insured unemployment. As expected, inflation was lower than a month ago and amounted to 2% YOY (2.4% in May) exceeding market expectations by 0.1 percentage point. On the other hand, however, its core index (excluding energy and food prices) fell from 2.1% to 1.9% on a yearly basis, although a reading of 2% was expected.

In turn, the data from the Department of Labor showed that the number of jobless claims went up to 247k (245k was expected) and the number of insured unemployment was 1.945 million (5k less than expected). Although the readings were still relatively close to recent lows, the last few weeks drew a clear upward trend in both cases.

For the dollar, the news turned out to be relatively neutral, although it may lose value because of the stronger euro and investors' waning confidence in a further rate hike in the US this year after Janet Yellen's last speech.

Good scenario for the zloty

Reports from abroad paint a positive scenario for the Polish currency. The recent months have shown that the relatively cheap dollar, with the improving situation in the eurozone and rising stock indices in both Europe and the US, create favourable conditions for zloty appreciation.

If the growth rate of US consumers’ prices was to slow down below 1.7% on a yearly basis, the value of the dollar in relation to the zloty could set new lows and move towards the lowest level since mid-September 2015, around 3,66.

Tomorrow’s preview

Probably the most important event of the day (or maybe even of the week) will be tomorrow's publication at 2.30 p.m. of June's consumer inflation (CPI) data in the US. Its pace has gradually slowed down in the previous three months - the core index (excluding energy and food prices) has even fallen to the lowest level in nearly two years.

The Federal Reserve takes into account the PCE inflation for its inflation projection, hence the CPI is somewhat less important in the context of the US economy. However, it may give investors an indication of the underlying trend, and in the context of the recent significant weakening of the dollar, it may cause substantial fluctuations - particularly in the case of deviation from expectations (1.7% YOY).

At the same time as the consumers’ inflation, we will also find out about the retail sales data for June. The last two months have missed market's expectations and even decreased by 0.3% in May compared to the previous month. The market consensus currently points toward an increase of 0.1% MOM.

At 3.15 p.m. the Federal Reserve will present the data on June's industrial production. In May, its level remained unchanged from April, although it increased by 2.2% YOY. A decrease of its main component, i.e. manufacturing production by 0.4% MOM, translated into a slightly worse than expected result of the main index. The median of market expectations assumes it will grow by 0.2% MOM in June, which could increase total industrial output by 0.3% MOM.

45 minutes later, the University of Michigan will introduce July's preliminary consumer sentiment index data. It fell in June by 2 points from 97.1 points which we observed in May. Therefore, it moved further away from January’s 10-year highs to which it had stayed close in preceding months. Given the recent political turmoil in the United States, consumer sentiment may have slightly diminished.

In a short period of time (1.5 hours), the market will be flooded with quite a lot of information about the US economy. The probability of it being one-sidedly positive or negative for the dollar is small, hence we can expect an increased trading range. However, as it was mentioned at the beginning, it is more likely that the inflation reading will determine the dollar’s further trading path.