Afternoon analysis 19.05.2017

A better sentiment on the global market didn’t translate into a stronger dollar. Zloty was still in good condition, however, April data from the Polish economy slightly disappoint.

Markets in a better mood

After yesterday’s better-than-expected retail sales data from the UK in April, today was another good day for the pound. CBI shared the results of its survey of 432 British manufacturers which showed that order books were the highest in two years. Output growth in the last three months increased as well: 41% of businesses said the volume of their output was up while only 12% said it was down, giving a balance of +28%, the largest since December 2013.

However, pricing pressures remain strong among British manufacturers. They still expect a sharp increase in average selling prices, albeit those expectations somewhat eased on their February peak. Today’s CBI publication supported the pound which was the most expensive since September 2016 - the GBP/USD pair remained slightly above the 1.30 level. One has to remember, though, that was also the result of a very weak dollar.

The dollar index (DXY) decreased today even further, close to the 97 boundary, the lowest level since 9th November (after the election results). That was mainly due to the EUR/USD rising close to 1.12. The US currency downfall has been a result of the increased political uncertainty. There aren’t any planned events or publications that could potentially strengthen the dollar, so it will most probably remain under pressure in the coming days.

Zloty remained strong

Today was another good day for the Polish currency. A better sentiment on the European stock market coupled with a greatly weaker dollar was a perfect combination for the zloty to appreciate against most currencies. It gained the most against the globally weaker dollar – the USD/PLN pair fell again today below the 3.76 level and was closing on recent lows. The Polish Central Statistical Office (GUS) published today data regarding industrial production, retail sales and the PPI index in April. The aforementioned data fell short of expectations and were worse than March readings. The industrial production decreased by 0.6% compared to April 2016 which was also the first fall since October.

That was partly to an unfavourable calendar in April this year – the seasonally adjusted data showed a 4% increase year-over-year. Retail sales increase by 8.1% YoY – although the result was less than expected (9%) and below March level (9.7%), the still relatively high level of retail sales increases should positively impact the GDP growth rate. The PPI (producers prices) index in April fell to 4.3%, 0.2 percentage points below expectations, but remained still relatively high. The last four months saw readings above 4%.

Although today’s GUS data were slightly below expectations, zloty value directly after their publications seem not to reflect that. The trading on the Polish currency was mainly driven by global sentiment than by local. It’s important to note that zloty’s high valuation and today’s worse-than-expected data could spark a slight correction.

Next week’s preview

As we mentioned in our previous comments, the last day’s market turbulence caused by political factors coming from the US probably won’t disappear soon, although some of the declines was reversed yesterday. One has to expect, however, that the possibility of increased volatility and fast sentiment changes remain relatively high.

There’re no significant macroeconomic events or publication planned for the first two days of next week’s trading. The Ifo institute will publish on Tuesday the Business Climate Index which climbed to the highest level (112.9 points) in nearly six years. Destatis will publish the final data regarding the GDP growth in Q1 on the same day (preliminary reading showed a 1.7% year-over-year increase). A confirmation of the positive trend in the Ifo index and solid GDP data of the biggest economy in the eurozone could have a positive impact on the euro.

On Wednesday, IHS Markit will report PMI indexes for the euro zone, including Germany and France among others. We’ve been observing an upward trend in the case of both the industrial and services sectors which, in turn, was a confirmation of the better sentiment currently seen in Europe. Should this trend be maintained (which is the current consensus), the euro could gain in value.

The last two days of next week’s trading will see the Q1 GDP growth rate data from the UK and US economies being published on Thursday and Friday respectively. Although these will be the second Q1 readings and no significant changes should be expected, taking into account the recent volatility in the currencies of both countries and political factors influencing them, a deviation from preliminary readings could increase the level of the dollar’s and pound’s exchange rate fluctuations.