Afternoon analysis 21.08.2017

A change in the situation before the beginning of the US stock market session - the dollar incurred losses and fell to the lowest level in a week. The zloty has been gaining on USD weakness - changes have not been large, but the USD/PLN pair has fallen to the lowest level since Thursday.

The euro has pared some losses

Today's trading day on the FX market (till 3.00 p.m. CET) may be summarised as calm. Changes in the main currency pairs have been limited, and their levels have been close to those from the end of previous week. This has been due to the limited macroeconomic publication calendar.

This week, investors' attention may be primarily focused on the central bankers' conference in Jackson Hole (USA). On Friday, Janet Yellen (the president of the Federal Reserve) and Mario Draghi (president of the ECB) are scheduled to give speeches.

Draghi's speech will probably attract most of the market's attention. For a long time, there has been speculation about the possible winding down of the ECB’s bond-buying program. Some market participants may expect details of QE tapering in the context of an improving eurozone economy as well as gradually increasing inflation.

As a result of these speculations or of the anticipations of news agency reports, fluctuations in the dollar and the euro exchange rate may lead to an increased range of price movements in the last days of the week.

Today until midday, the euro has lost slightly, while the dollar has gained. With the coming session of the US stock market and increased activity of US investors, the situation has reversed.

The dollar incurred losses, but similarly to midday the changes have been small (approx. 0.2%). It has been enough to push down the dollar index (DXY) to the lowest level in a week (approx. 93.15 points). The EUR/USD pair has pared morning losses and risen from 1.173 to 1.179 - its highest level since the early hours of last Thursday.

Weak dollar has been helping the zloty

Once again, we have now observed the relationship between the dollar and the condition of the zloty in relation to the main currencies. The aforementioned dollar weakness just before the start of the US stock market session triggered zloty appreciation, although the change was not large (up to approx. 0.3%). Globally, the weaker dollar meant that the USD/PLN fell to around 3.62, which is close the lowest level since August 8.

A weaker dollar may help the Polish currency, but a further decrease of sentiment and declines on the US stock exchange could worsen the current situation of the zloty. However, the potential for significant changes in the zloty's value seem to be limited. On the one hand, strong GDP growth and still high consumption and industrial production levels have been supporting the zloty, but on the other hand, political risk will continue to limit its growth potential.

It is also worth noting that the Polish currency has been sensitive to sentiment changes in the market (especially decreases) and may be subject to significant changes in response to external factors. Therefore, the weakening of the dollar, connected with significant declines in headline US indexes, may lead to the weakening of the zloty.

Tomorrow's preview

Tomorrow at 11.00 p.m., the ZEW Institute will publish August's economist sentiment index for the eurozone and Germany. The index for the single currency area has been steadily rising for a year, emphasizing the improving condition of economies in the eurozone, which also has been strengthening the euro.

This index has also been at a relatively high level for the largest European economy, despite the fact that through the past two months it has incurred losses, mainly due to lower expectations of the future economic situation.

The median of market expectations in both cases suggest a further decline in this index in the aforementioned cases, up to 34.2 and 15 points respectively for the eurozone and Germany. Although the data itself will likely have limited impact, in the context of no other relevant publications it may give investors a pretext for a noticeable reaction in the euro valuation.

In the case of reading below the expectations, the euro especially could incur some losses and downward pressure. This might also be increased by the minutes from the last ECB meeting, which pointed out the possible overshooting of the euro rate.