Afternoon analysis 23.06.2017

A calm end to the week in the currency market, however, the dollar was slightly weaker. The Polish currency continued to undo the recent losses but still remained weaker than a week ago.

EUR/USD close to 1.12 yet again

Today’s session on the currency market proceeded relatively calmly. Besides the morning’s PMI readings for the euro area, there weren’t any key publications that could increase volatility in the market. The dollar’s was slightly weaker today, however – the EUR/USD pair traded just below 1.12, a level which could be tested during the afternoon session. The dollar’s index (DXY) by 0.2% lower and oscillated near 97 points.

A slightly weaker US currency caused the GBP/USD pair to move above the 1.27 level, however, this was also brought about by BoE’s Kristin Forbes hawkish comments and Theresa May’s offer to allow EU citizens living in the UK to stay after Brexit. The pound has recently been quite volatile due to political factors and that could also determine its value in the next trading days.

At 3.45 p.m. preliminary PMI data for June for the US manufacturing and services sectors will be published. Fifteen minutes later, a report regarding new home sales will be shared. Although this data is considered rather second-tier, the dollar’s volatility could increase. The market consensus pointed towards an increase in both cases. Should the data come short of expectations, the US currency could slightly lose value and the EUR/USD move above 1.12, although the scale of the reaction will probably not be substantial.

Zloty in a slightly better condition

The last 8 days haven’t been particularly good for the Polish currency – the euro cost 4.20 PLN only last Thursday but it cost 4.26 PLN yesterday morning. The condition of the zloty improved in the next few hours and we saw a continuation of that trend today – EUR/PLN traded around the 4.23 level. The biggest factors contributing were oil prices which halted its rapid fall and a still relatively weak dollar.

If the US indexes and oil prices don’t significantly fall in the afternoon, the zloty’s situation should remain stable and downward risk limited. The Polish currency could be susceptible to increased volatility on Friday when inflation data for the euro area and the US will be published.

A potential risk for the zloty could be higher than expected inflation in the US, which could possibly cause the dollar to strengthen. Additionally, should the inflation in the eurozone drop lower and render a deterioration in the sentiment, the zloty could fall in value as a result.

Next week’s preview

There are a few publications planned for the end of next week that could significantly impact the currency market. At 2.30 p.m. on Thursday, we will get to know the Q1 GDP growth rate final reading in the US. Preliminary data indicated that the economy grew at a pace of 0.7% year-over-year, although the second reading showed an increase of 1.2% YOY (0.3 percentage points above expectations). The current market consensus point towards maintaining this level but should the final reading deviate from the consensus, the dollar could become quite volatile.

PCE inflation in May, probably the most important data for the US currency this week, will be published at 2.30 p.m. on Friday. This index has been taken into account by the Federal Reserve (Fed) into their inflation projections. It could prove even more important this month as the last Fed meeting showed that most of the monetary committee’s members believe in the temporary nature of the current slowdown in price growth.

Hence, another drop in PCE inflation could cause the US currency to lose value – especially if the core index (excl. energy and food) fell as well. The main index was 1.8% YOY in February, although decreased to 1.5% YOY in the following two months. The median of market expectations for May currently points towards 1.4% YOY – a drop below this value could spark a sell-off of the dollar. The most recent global inflation trend suggests that the chance of a reading above 1.5% is very limited.

The UK’s GDP growth rate in the Q1 will also be published on Friday. Although it will be the third and final reading, a deviation from the consensus and previous reading (2% YOY) could increase the pound’s volatility. Current account data for Q1 will also be shared alongside the GDP report. A substantial increase of the UK’s deficit in the current account could slightly weaken the pound – the market consensus suggests an increase from a deficit of 12 billion to 16 billion pounds.

Also on Friday, Eurostat will publish preliminary data regarding the inflation level in the euro area in June. Following the global trend, it decreased in May to 1.4% YOY and core index to 0.9% YOY. A further reduction in June could postpone the chances of tightening the monetary policy by the European Central Bank, which could decrease the euro’s value and somewhat dampen the sentiment in the euro area.