Afternoon analysis 21.07.2017

The euro had remained in good shape despite dovish Mario Draghi. Zloty was under a strong local pressure, but the risk of deeper depreciation has remained relatively limited.

The dollar incurred further losses

Today, there were no significant publications that could significantly affect the exchange rates. The dollar, however, was still under pressure. This was mainly due to the strengthening of the euro, following the European Central Bank's conference and the political factors behind the investigation lead by Robert Mueller in the US. This morning, the EUR/USD pair has set a new two-year high of approx. 1,168, and although it has fallen from this level in the following hours, it has still been close to the recent record.

The recent weakness of the dollar is not only reflected in its relation to the euro but also to the yen. Today, the Japanese currency was the most expensive in relation to the dollar in nearly a month. Only in the last 10 days, has the dollar lost more than 2% against the yen. It must be noted that the Japanese central bank has been adopting an ultra-mild monetary policy that weakens the yen, which may also give an indication how weak the dollar has been today (where the interest rate hike has started in the United States).

As it has been already mentioned in our previous comments, the strengthening of the euro after a dovish Mario Draghi's conference (the President of the ECB) is unlikely to be lasting (not confirmed by the performance of Treasury bonds yields). On the other hand, it must be remembered, that the political factors have also influenced the currencies of late. Therefore, they have been under pressure, both the dollar and the pound. In such circumstances, the euro may came out as the winner.

here has been a revival in the euro area supported by both hard and soft data (indicators based on industry surveys). Inflation is one of the factors that can further support the euro and now it could get back on track. In recent months, it has been weakened due to the drop in oil prices. Now, they have returned to the level of nearly 50 dollars per barrel (in the case of Brent oil). In the coming months, this may contribute to rising inflation in the eurozone and consequently, increase the chances of faster monetary tightening and ultimately, may strengthen the euro.

The zloty under the pressure

Since the morning hours of trading, the Polish currency was under a significantly pressure, mainly due to the local factors. In the following hours, it also has not received any support since drops on the European stock exchanges have occurred - Dax, the main German index was lower approx. 1%. The Polish main index, Wig20, has changed about half-percent of profit into a half-percent loss (as of 3 p.m.).

Even before the opening of the New York Stock Exchange, future contracts for major US indexes were also falling. If we are to see a decline of major US stock indexes today as well, the zloty may be under more pressure.

However, it must be remembered, that despite zloty’s weaker condition today, its valuation has still been relatively high. The further weakness of the dollar and the improving economic situation in the eurozone may reduce the risk of a deeper sell-off of the Polish currency.

Next week’s preview

On Monday, a potentially significant information for the euro will be released. IHS Markit will publish July's preliminary data about PMIs for the industrial and services sector for the eurozone and, among others, for Germany and France. Taking into account the recent increase in the euro area’s currency fluctuation and its appreciation, these publications may cause a relatively large change in its valuation. The market expectations currently indicate that the PMI will be slightly below the June's levels.

Wednesday, however, may be very important for the currency market. Just before noon, the Office for National Statistics (ONS) will provide the UK's preliminary reading on the economic growth in the second quarter. Following a 2% increase in Q1 (on a yearly basis), it is expected to slow down to 1.7% this year. Despite the fact that recent Brexit process issues weakened the pound, the latest labour market report has given support to the British currency. Although political factors, in the long run, are likely to play a greater role in pound’s valuation, a good reading (above 1.7%) could support it and cause its appreciation.

At 8.00 p.m., CET, the markets will to face probably the most important event of the next week. After a two-day meeting, the Federal Reserve will release a the monetary committee’s (FOMC) statement. While the change in interest rates is not expected, in the context of recent weak data (both inflation and wage growth), the Fed may want to alleviate its message somewhat, and some members may see lower pressure on interest rate hikes in subsequent periods. Such a scenario could weaken the dollar, which in the near future may also be under the pressure due to political factors.