Afternoon analysis 17.03.2017

Euro weakens due to bigger support for Marine Le Pen. No change in industrial production in the U.S. in February. Zloty’s good run continues.

Euro erases some of its gains, no change in U.S. production

Opinionway published today new poll results for candidates running in the French elections, which show that support for Le Pen in the second round reached its highest level yet in March, although she still loses to Emmanuel Macron (59-41). This caused the euro to depreciate. The EUR/USD pair went down 40 pips from 1.077 to even 1.073.

Taking into account that according to pollsters, Le Pen would lose by a considerable margin in the second round to both Macron and Fillon, her chances for winning remains bleak. The euro’s relatively high volatility is a testament to an underlying high uncertainty to populist movements in the euro zone and its stability in the future. This in turn proves that the euro could be prone to increasing volatility as the election date nears (first round will be held on 23rd April).

The U.S. currency remained relatively stable today. The dollar index (DXY) oscillated just above the 100 points barrier. The Federal Reserved published today data regarding the industrial production in February which didn’t change in relation to January. However, year-over-year it grew by 0.3%. Manufacturing production turned out to beat market expectations by 0.1 percentage points in February when it grew 0.5% MoM. The dollar's reaction to the data, however, was somewhat limited. The EUR/USD pair remained in close vicinity to the 1.073 level, although in large part it was caused by today’s weakness of the euro.

Polish macroeconomic data below expectations but trend remains positive

The Central Statistical Office (GUS) said today in a report that the industrial production in February grew by 1.2% YoY, while an increase of 3.5% YoY was expected. This was the lowest growth rate observed since October. However, after eliminating seasonal factors, the growth stood at 4.8% YoY. However, construction output decreased yet again by 5.4% YoY – market consensus was at -0.1%. Retail sales proved to be slightly below expectations as well – it grew by 7.3% YoY while 11.4% was expected. Just as we mentioned in our midday analysis, this economists’ forecast could be too optimistic taking into account that February this year had one less day than in the previous year.

Although the data proved to be below what the market expected, they confirmed the underlying positive trend in the economy. This was a good signal for the Polish currency which appreciated in recent days. Its value grew in relation to the euro in particular but it was also a result of the euro having been weaker today. The EUR/PLN pair has been falling toward the 4.29 level and if the trend weakening the euro persists later today, this boundary could be tested. The dollar (USD/PLN) have been trading marginally under the 4.00 level today. Zloty also grew stronger towards the franc – the CHF/PLN pair moved towards the 4.00 boundary as well. In the case of the Swiss franc, falling below it would mean testing four-month lows.

Next week’s preview

The next week doesn’t have many very important macroeconomic events planned which could potentially substantially impact the currency market. Hence, we expect that the trading range of major currencies will be relatively narrow. On Tuesday the data regarding CPI inflation in the British economy in February will be published. Inflation has been growing globally at a fast pace in recent months, mainly due to growth in energy commodities prices.

However, this data in particular, could prove important in the context of the recent Bank of England monetary policy meeting, where a member voted for a rate hike for the first time in over a year. A high inflation reading could then increase the likelihood of a rate hike in the near future and could cause the pound to appreciate. The CPI index in January was 1.8% YoY and the market consensus for February is currently at 2.1%.

On Friday, IHS Markit will publish the preliminary March manufacturing and services PMI data for the eurozone and Germany. The final February readings proved to be slightly below expectations, although the underlying trend remains positive in both cases. We have also seen evidence of an improving economic condition of the euro zone in consumers’ and economists’ sentiment indices, which have been improving as well.

The recent economic events have proved to be favourable for the euro: relatively hawkish signals coming from the European Central Bank and slightly less hawkish coming from FOMC. A confirmation of the upward trend in manufacturing and services sectors in both the eurozone and Germany could add yet additional positive impulse for the euro and strengthen it.