Afternoon analysis 19.01.2017

The European Central Bank did not surprise, byt the dovish message from Mario Draghi wore-off the euro. Positive data from the American economy strengthen the dollar. The Polish economic data is positive as well.

Draghi’s comments wear-off euro

The European Central Bank made no changes in its monetary policy. The QE program will remain at the level of 80 billion euro per month until march. As of April, this level will decrease to 60 billion euro and will remain valid until December 2017, or beyond. This will be determined by inflation. Moreover, the ECB announced that the QE program may be extended, in the case of potential deterioration of the economic conditions.

During his press conference, Mario Draghi claimed that the topic of the QE reduction was not discussed. He also emphasized that there are no arguments in favor of a change in baseline inflation, for the time being. However, he said that interest rates need to be low no, so that they can become higher in the future.

Draghi’s statements wore-off the euro. His press conference overlapped with readings from the American Labor Department, which stated that jobless claims went down to 234k (vs expected 254k). Moreover, the Philadelphia Fed index increased as well (23.6 points).

This data pushed the EUR/USD below 1.06, while the USD/JPY went above 115. Moreover, the dollar’s index (DXY) reached the level of 101.5. The end of this week may be interesting. Tomorrow, Janet Yellen will make her testimony at 2.00 AM and at 6.00 PM Donald Trump’s oath ceremony will start. Taking into consideration Draghi’s press conference, it’s more likely that the dollar will strengthen.

Positive data from Poland

The Polish Central Statistical Office (GUS) informed that the industrial production for December increased by 2.3% YoY (positive 3.7% YoY in the industrial processing sector). It’s worth noting that a decrease in the building production was not as high as expected (negative 8.8% YoY vs negative 12.5% YoY). This index has recently been in a positive condition (positive 34.8% MoM).

The GUS also published the retail sales data for December (positive 6.4% YoY). The largest increase was quoted in sale of food, beverages and tobacco (19% YoY and 29.8% MoM). This positive data is a positive signal for the economic growth in the fourth quarter. The end of 2016 was really positive for the Polish economy, with only the October data being disappointing. This suggests that the GDP index won’t be below 2%. However, it’s still below the estimated 3.4%.

The zloty was relatively stable. The EUR/PLN remains near 4.37. However, due to the dollar’s strengthening, the USD/PLN reached the level of 4.12. The stronger pound caused the GBP/PLN to go above 5.07, which is its highest level in ten days.

Tomorrow’s events

At 2.00 AM, Janet Yellen will make her testimony at Stanford University. Her yesterday’s testimony strengthened the dollar, due to a statement that the majority of the Fed Board, as well as of presidents of the regional Fed departments, expects “a few” rate hikes by the end of 2019. Therfore, investors will try to find new suggestions regarding the future interest rates level.

At 10.30, the Office for National Statistics, will publish the British retail sales data for December. This index suggests a potential consumption level, which is the largest portion of the GDP. This publication may cause increased volatility on the pound, which has been large already, due to the recent statements from Theresa May regarding Brexit. This is because it may suggest the potential GDP growth for the fourth quarter.

The market expects the retails sales index for December to increase by 7.2% YoY. Expectations regarding baseline index is at the level of 7.6% YoY.

Tomorrow’s main event will most likely be Donald Trump’s testimony, which is scheduled for 6.00 PM. Taking into consideration the impact of his tweets on the dollar, as well as on stock exchange companies, we may expect significant fluctuations (especially if Trump refers to increase in infrastructural expenses or a decrease in taxes.) In his recent interview with The Wall Street Journal, he claimed that the dollar is too strong. This caused a significant sale of the American currency. There is a risk that such statements will appear again. This may increase uncertainty in the markets.

At 7.00 PM, Baker Hughes will publish the data regarding active drills. Last week’s report showed that their amount decreased from 529 to 522. However, this is still near the result from January 2016. Recently, the oil prices have been relatively volatile, due to speculations regarding slates. Another reason is volatility in the dollar’s value (the oil prices are expressed in the American currency.) Moreover, the market is still uncertain, whether the OPEC members will fulfill their agreement from November, which has been valid since the beginning of this year. If this publication shows that an increase in active drills is consistent with the current trend, this would confirm the market’s speculations regarding the return to producing oil from slates and cause supply pressure on the oil prices.