Afternoon analysis 24.07.2017

The euro remains strong and the US currency is still under the pressure. Today's publication of PMI indicators for the US may only slightly affect the dollar's performance. Today, the zloty is in better shape, but in relation to the region's currencies has remained relatively weak.

A calm session

The volatility during today's FX session was limited. The worse than expected PMI data from the eurozone did not cause the single currency selling-off, which remained close to the two-year peaks in relation to the dollar. The EUR/USD pair was close to 1.165, similarly as till the midday.

Due to the lack of more relevant data, a bit of volatility in the dollar's quotes may be introduced July's publication of industrial sector PMI indexes and services in the US economy. In recent months, the PMI manufacturing index has gradually decreased to the lowest level since October. This was somewhat in contrast to the ISM index, which is more significant in the case of the US economy It has recently grown to the highest level in 2.5 years, with a more significant US economy.

In recent months, the PMI and ISM indicators for the services sector have not indicated any specific trend, but similarly to the industrial sector, the PMI pointed to a lower activity than ISM. For these reasons, this publication may eventually have a limited impact on the US currency, even in the case of deviations from the consensus. Market expectations for the manufacturing sector indicate a reading of 52 pts (unchanged) for the industrial sector and a drop to 54 pts (by 0.2pts) for the services sector.

The zloty has kept morning's gains

Last week, we have already emphasised that the local political factors may play a relatively important role in the valuation of the Polish currency. After Friday's selling-off, the zloty has clearly gained in value today. The reason for his appreciation was the President of Poland's announcement of a veto for two bills, which had already passed in the parliament.

Taking into account today's reaction, foreign investors may be expected to look closely at the political factors in Poland, and those may further influence the zloty. Although the valuation of the Polish currency has been still relatively favourable, today's appreciation did not reverse all losses incurred on Friday.

This situation is particularly visible in relation to the currencies in the region. In relation to the Hungarian forint, the zloty was still near its lowest level since March (PLN/HUF was still below 72). The situation was similar in relation to the Czech koruna - the PLN/CZK exchange rate was close to the lowest level since the beginning of the year.

Tomorrow's preview

At 10.00 a.m., CET, Ifo will present July's business climate index in Germany. Last month, it rose to historical records of 115.1 points, the same highlighting the very good situation currently prevailing in the largest economy in Europe. While a slight decline in this index is expected in July (to 114.9 pts), its recent record highs may provide additional arguments for maintaining a relatively high valuation of the euro.

At the same hour, the Polish Central Statistical Office (GUS) will publish data on June's unemployment in the Polish economy. The unemployment rate has gradually declined in the last few years. In May it set a new multi-year record when it has dropped to 7.4%. In June of last year, this index decreased by 0.3 percentage points compared to the previous month, and two and three years ago by 0.5 pp.

Currently, the market estimates point towards a reading of 7.1%. Despite this positive news for the economy, the unemployment rate itself is not a good indicator of the labour market's condition. Although it is improving in Poland, it also struggles among others, i.e. with a relatively low employment rate.

As a result, the impact on the zloty will probably be very limited. Especially now, when the currency’s valuation has been largely determined by internal political factors. For the zloty, however, the FOMC's decision on the US's interest rates may still prove important (planned to be released on Wednesday). If the statement turns out to be relatively hawkish and the dollar would indeed gain in value, the Polish currency could, in turn, depreciate. However, the hawkish statement scenario probability is relatively low - the recent inflation data or the change in average wage growth rate do not give the FOMC members an incentive to raise interest rates at a faster pace.