Afternoon analysis 26.01.2018

Strong import growth hampered the US GDP growth rate in Q4, but other components indicate that the economic development pace remained high. Mnuchin withdrew from his earlier comments supporting a weaker dollar. The dollar may appreciate in the subsequent hours, at the same time putting pressure on the zloty.

Relatively good data from the USA

Today, the Bureau of Economic Analysis (BEA) published Q4 data on the US GDP growth rate. It appeared to be slightly worse than expected. During the last three months of 2017, the US economy grew at a pace of 2.6% per year, although it was expected that the readings would be higher by 0.6 percentage points. Although the main reading differentiates from consensus, when looking deeper into the details it is not so bad.

Such a small increase in Q4 was mainly caused by a significant increase in imports at that time. It elevated by 13.9% per year (in Q3 there was a 0.7% decrease), which resulted in the negative contribution of 1.96 percentage points in relation to the GDP growth pace. Therefore, net export had a negative contribution of 1.13 percentage points, the most in a year.

The positive tendencies in investment and private consumption growth have still been observed in the market. Investment increased by 3.6% and consumer spending by 3.8% (on a yearly basis). Spending contribution compared to GDP growth amounted to 2.58 percentage points (the most in three years). This suggests that the economic development pace in the next period should remain high (the weaker dollar may limit the impact of the trade deficit).

Therefore, this data should support dollar valuation, despite a weaker than expected overall growth pace. Today's statement by the US Treasury Secretary Steven Mnuchin should be positive for the dollar. In an interview for CNBC, he said that a stronger dollar is beneficial for the US economy and that the short-term dollar valuation is unimportant.

While Mnuchin's earlier comments caused a strong dollar depreciation (these which he withdrew from today, saying that they had been pulled out of context), dollar appreciation can be observed in the following hours.

Zloty will go into the red?

In the context of the past few days, zloty valuation in relation to the main currencies remained at a very high level around 3.00 p.m. One euro cost 4.14 PLN and the dollar cost 3.33 PLN. These results are close to several year lows. However, taking into account the positive impulses that appeared on the market, it will be difficult for the zloty to maintain such good valuation.

The Polish currency has recently been strongly dependent on dollar movements. Dollar strengthening in the following hours may not only depreciate the USD/PLN pair but also the entire zloty basket. During the afternoon session (when the US investors are more active), a dollar rebound and a strong fall in the EUR/USD will be observed. Moreover, the zloty may incur some of the increases gained over the past few days.

Next week's preview

Next week could prove important for the currency market. On Wednesday, Eurostat will present January's preliminary consumer inflation (CPI) data for the eurozone. The median of market expectations indicates in CPI a drop from 1.4% (on a yearly basis) to 1.3%, mainly caused by the high base from last year (1.8%). A reading above this level could strengthen the euro and create further pressure on the dollar. However, in the evening significant fluctuations in these currencies are likely to be observed.

At 8 p.m., minutes from the Fed monetary committee after the two-day meeting will be published. Interest rates will most likely be unchanged, however, an indication from the statement that suggests further increases in the next part of the year will be important. The core scenario presents three rate hikes, but if the FOMC's statement indicates a fourth increase, the dollar may appreciate.

On Friday, the US Department of Labor will publish a monthly labour market report for January. Market attention will focus any changes indicating employment and average hourly wages. Especially the latter may be important for the US currency. Faster (than expected) wage growth may put pressure on inflation, which is constantly suppressed in the US. Therefore, an increase by 0.1 percentage points above the 2.7% year-on-year consensus (0.3 month-on-month) could significantly strengthen the dollar, which could weaken the entire zloty basket.