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Afternoon analysis 25.01.2018

25 Jan 2018 16:19|Bartosz Grejner

Mario Draghi still dovish but the EUR/USD increased above 1.25. In the end, the ECB's statement may have limited impact on quotations on the foreign exchange market. The zloty remained relatively stable with fluctuations being mainly visible in the USD/PLN pair.

EUR/USD above 1.25

The most important event of the day was Mario Draghi's press conference today, the President of the European Central Bank (ECB), following the ECB's two-day meeting. As expected, interest rates and the Asset Purchase Programme (APP) remained unchanged.

During the conference, Draghi repeated (as in previous conferences) that continued extensive monetary stimulation was still required to support the inflation. The ECB will also maintain the APP until a sustained increase is seen. As expected, the President of the ECB referred to the high euro valuation, pointing out that its large fluctuations are a source of uncertainty and need to be monitored for the sake of price stability.

Although Mario Draghi's statement was dovish, it did not hamper euro appreciation and the simultaneous weakening of the dollar. This is mainly due to the trend observed earlier, not directly in Draghi's words. The main currency pair's quotations during the conference reached new highs of over 3 years as the EUR/USD rate rose to about 1.2530, although an hour earlier it was below the 1.25 boundary.

As a result, the ECB has not changed its position and therefore the ECB's final influence on the main currencies' quotations should be limited. Currently, the statements made by the US Treasury Secretary about the preference of the weaker dollar, or fears about custom wars and protectionism of the United States seem to have more impact on the main pair's quotations. The calendar of scheduled events in the following hours is practically empty, so the market will continue to discount today's events. The EUR/USD quotations seem to stay around 1.24-1.25 level.

New lows on USD/PLN

Strong increases on the EUR/USD pair during Mario Draghi's conference also caused a sharp dollar depreciation in relation to the zloty. USD/PLN fell to approx. 3.308 PLN (a level not observed since the end of October 2014). An hour later, the USD/PLN rose by nearly 0.02 PLN. Fluctuations were mainly observed on this currency pair. Euro and franc quotations were close to yesterday's closing levels. GBP/PLN lost due to the increase in the euro value (and the growth of EUR/GBP) as after 3.00 p.m. its quotations were by 0.02 PLN (4.75) lower than at about midday.

During the rest of the day, the fluctuation on the Polish currency should be limited to USD/PLN, although it should not be significant. The risk of the dollar strengthening significantly, and consequently weakening the whole zloty basket, is rather small. The absence of further impulses for the single currency should keep the euro "in check", therefore, there is little chance of changing the trend today.

Tomorrow's preview

The preliminary readings on GDP growth pace in Q4 for Great Britain and the US will probably be the most important publications of tomorrow's day. At 10:30 a.m., the Office for National Statistics (ONS) will publish data for the British economy, which according to market estimates grew at a rate of 1.4% per year (this would be the lowest growth pace in four years). Taking into account the pound appreciation observed over the past few days, this data may significantly affect its valuation. The British currency could get another argument for growth, if the consensus were exceeded, especially by more than 0.1 percentage points.

At 2:30 p.m., the Bureau of Economic Analysis (BEA) will provide analogous data for the US economy. The US currency has been under considerable pressure in recent days, due to the US Treasury Secretary's comments highlighting the benefits of the weak dollar. The median of market expectations indicates that the US GDP increased in Q4 by 3.0% per year. In recent quarters, BEA data has positively surprised and exceeded the consensus in the first readings. If it turns out that the dollar would be higher by 0.2 percentage points or more, the dollar could gain support, taking into account the current weakening factors.

25 Jan 2018 16:19|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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