Afternoon analysis 14.06.2017

Surprisingly weak data in May regarding consumer inflation in the US significantly decreased the dollar’s value and could reduce the probability of three rate hikes this year. Zloty benefited from a worsening condition of the US currency.

Weak data from the US

The dollar was fairly stable until 2:00 pm. The EUR/USD pair oscillated around 1.12 and the dollar’s index (DXY) was close to 97 pts. However, at 2:30 pm, May’s data regarding the consumer price index (CPI) and retail sales was published and proved to be much worse than expected. The core CPI (excl. energy and food prices) was 1.7% year-over-year – the lowest level in two years, while 1.9% YOY was expected.

Retail sales recorded their first monthly decline since March – they were 0.3% lower than in April while a 0.1% increase was expected. Core retail sales (excl. vehicle sales) behaved similarly and decreased by 0.3% month-over-month (vs. a consensus of +0.2%), which was also the first monthly drop in sales since August 2016.

The dollar reacted very negatively to the aforementioned data. The EUR/USD pair rose from 1.12 to 1.128. This also caused USD/JPY to once again drop below the 110 boundary. As a result, the dollar’s index (DXY) declined to 96.4 pts – its lowest level since November 9th of the previous year.

A lower inflation reading than last month’s was to be expected taking into account the global inflation trend. However, a 0.2 percent drop in core inflation could suggest that the Fed could be less inclined to realise three interest rate hikes in 2017 (there was one already). The CPI index isn’t the preferred inflation measure in the case of the US economy – the Fed uses PCE inflation, although their relatively low level and decreasing core inflation could decrease the probability of a three rate increases scenario.

The Polish currency gained on US data

The surprising data from the US helped the zloty as it gained against most major currencies, mostly against the dollar. The USD/PLN pair fell to 3.72 – less than 0.02 above 13-month lows. The Swiss franc also lost visibly in relation to the zloty as the CHF/PLN dropped to 3.85, which is near the lower boundary of last week's trading. The EUR/PLN oscillated around the 4.19 level, though, probably as a result of a significant gain in EUR/USD.

At 8:00 pm today, the Federal Reserve will publish a statement regarding its monetary policy from which we will probably learn about a 25 bp interest rate increase. The chances for the statement to be somewhat hawkish and strongly suggest yet another rate hike are relatively slim. In the context of the disappointing data from the US, the dollar likely won’t significantly gain value, although increased volatility around the publication time of the Fed statement is to be expected.