Afternoon analysis 25.08.2017

After an increase of 6.4%, July's durable goods orders in the US have recorded a fall of 6.8%. Data, however, had little impact on the market today - the market is waiting for the Presidents of the Federal Reserve and the European Central Bank. The Polish currency is also stable in the back of the day.

EUR/USD pair still at 1.18

After the largest increase in June's durable goods orders (by 6.4% MOM), its biggest drop in nearly two years was recorded in June, by 6.8% MOM, while a decline was expected by 6.0%. Transportation orders have been so high - in June they increased by 19.1%, while in July they decreased by 19.0%.

The core index for orders in July (i.e. excluding orders for transport goods), increased by 0.5% compared to the previous month, which was 0.1 of a percentage point above expectations and 0.4 of a percentage point more than in the previous month. Taking into account such significant fluctuations in both months, data will likely be neutral for the dollar trading.

In particular, shortly after its publication, at 4 p.m. CET, Janet Yellen's speech is scheduled (the President of the US Federal Reserve). By 3 p.m., movements on the currency market were not large: the EUR/USD pair fluctuated at 1.18, the GBP/USD at 1.28, and the EUR/GBP at 0.92. In turn, the dollar index (DXY) remained close to yesterday's level, i.e. approx 93.2 points.

Around and during Yellen's speech, the fluctuations in exchange rates will probably increase, also due to increased US investors' activity in the afternoon. However, the probability of significant changes in the dollar's value seem to be limited today.

Both, Yellen and, five hours later, Mario Draghi (President of the ECB) will hold relatively neutral speeches. The minutes of the last ECB Board of Governors meeting stated that they were worried about the euro's exchange rate being too high, therefore the chances of a hawkish speech from Draghi are rather limited.

A slightly better chance for a hawkish surprise is on Yellen's side. Although the recent macroeconomic data has not given her many arguments for such a statement, some market participants may prepare themselves for such a scenario, which may increase the fluctuation of the dollar.

Zloty has been stable

After yesterday's appreciation of the Polish currency, today we observed no significant changes. The zloty's value in relation to the main currencies has remained stable. On the other hand, we could notice further appreciation in relation to the forint, though not as strong as yesterday. Today, the PLN/HUF exchange rate has risen to 71.6 - the highest level since 9 August, although yesterday morning it was 70.3.

The Polish currency's value in the next few trading hours will, to a great extent, depend on the appearances of Janet Yellen and Mario Draghi at the Jackson Hole conference. In the basic scenario, the zloty may fluctuate, but the change in value could ultimately be modest.

If the market interprets the Federal Reserve president's statement as hawkish, i.e., increasing the probability of rate hikes, the dollar could appreciate. If the appreciation scale was significant (the EUR/USD pair fell to around 1.17), the zloty could also incur some losses.

Next week’s preview

The most important events which are more likely to have the significant impact on currency trading will begin to appear midweek.

On Wednesday, August's inflation data in Germany will be published - they can give guidance on the eurozone's inflation, which will appear on Thursday. A higher level than in the previous month (in both cases) may increase the likelihood of the ECB winding down the bond-buying program, thereby strengthening the euro.

On Wednesday, we will see ADP's research institute data on employment change and BEA’s GDP report for the second quarter (second reading) for the US economy. Taking into account the recent weakening of the dollar, this data can cause considerable fluctuations. Particularly, the ADP reading can give guidance on Friday's official employment change reading of the Department of Labor.

On Thursday, we will acquaint August's consumer inflation data (CPI) in the eurozone and July's PCE inflation in the US. The PCE index is used by the Federal Reserve for inflation projection, hence the US economy is relatively more important than the CPI. Between April and June, the PCE core index (excluding energy and food prices) has been 1.5% YOY. July's reading deviating from this level could significantly increase the dollar's volatility.

Friday's US labour market report will probably set the course for the dollar. The data contained in it, which may have the biggest impact on the dollar trading, is on wages and employment changes.

First of them is important due to its relatively high pace may exert upward pressure on inflation, which in turn may increase the probability of rate hikes (and strengthen the dollar). In the case of good correlation with the ADP data, the impact of employment change data will be rather limited.

Next week may, therefore, be very significant for the dollar and set a trend for the following weeks. Should the US data be good and/or better than expected and the dollar's appreciate strongly, the zloty could suffer. The Polish currency is sensitive to sentiment changes - a rise in the dollar's value, coupled with rising yields on US Treasury bonds, could trigger capital outflows from emerging countries, including Poland, therefore weakening the zloty.