Afternoon analysis 26.05.2017

Mixed came data from the US, however, the dollar gained on better than expected GDP data. The Polish currency was still in a relatively good shape.

A higher risk aversion, mixed US data

A higher level of risk aversion could be seen during Friday’s trading which was present on most markets. The European indexes dropped while “safe havens” gained with the Japanese currency and golf at the forefront. The yen gained as much as 1.5% against the pound as GBP/JPY declined to the lowest level in a month.

This was in a part an effect of a significantly weaker British currency which reacted to the latest elections polls. YouGov poll showed that the advantage of the Conservative Party over the Labour Party was lower than during the 2015 elections (5% vs. 6.6%). The British currency lost value because a lower support for the incumbent party could mean a weaker negotiation potential and a higher probability of a “hard” Brexit. GBP/USD decreased to the 1.284 level, the lowest in three weeks.

That was also the second day in a row of a batch of mixed data from the US economy. The second reading of the GDP growth rate showed an increase of 1.2% quarter-on-quarter, while expectations were for a 0.9% increase and the preliminary reading pointed towards 0.7%. However, the core durable goods orders disappoint with a decrease by 0.4% month-over-month, while an increase of 0.5% was expected. This could point to a lower industrial production activity.

The main durable goods orders reading, while decreasing by 0.7% month-over-month, turned out to exceed expectations of 1.2%. There was also an upward revision of the March reading from 0.7% to 2.3%. In general, the dollar reacted positively to the data. The EUR/USD pair decreased from around 1.12 to 1.118. An even stronger response could come in the next few hours, when the US investors become more active.

Zloty still close to recent lows

Today’s trading on the Polish currency proceeded in a calm fashion. Zloty still remained close to recent lows in relation to most currencies, though, it hasn’t been gaining significantly (bar against the pound). A better condition of the dollar coupled with a better-than-expected GDP growth rate in Q1 caused the USD/PLN pair to increase to 3.74. On the other hand, the aforementioned British poll caused a global weakening of the pound which pushed GBP/PLN as low as 4.78 around 1 p.m. – the lowest level since November, though it went back to around 4.80 in later hours.

A potentially rapid appreciation of the dollar could be a risk for the Polish currency in the later hours of trading which could limit the demand for zloty. However, taking into account the still-present good sentiment towards emerging market currencies, the risk of a swift zloty’s depreciation seems fairly limited.

Next week’s preview

On Monday, trading could be limited as the stock exchanges in Great Britain and the US will be closed due to holidays. Additionally, there are no important economic publications planned.

The week could prove important for the dollar, though. The PCE inflation data for April will be published for the US economy. The index has been used by the Federal Reserve in their inflation projections. Should it deviate from market consensus, the distribution of rate hikes probability could change. Taking into account the dollar’s recent slump, a better than expected reading of PCE inflation (above 1.7%) and its core index (above 1.5%), could cause the US currency to gain markedly.

ADP will publish on Thursday the change of employment in the nonfarm sector. The last three out of four months saw reading above 200k, while the April’s increase was 177k. A count between 150k and 200k would probably be neutral, while an increase of over 200k could be positive for the dollar.

The last day of the week could be even the most important for the US currency. The Department of Labor will publish a report regarding the US labour market in May containing the unemployment rate, nonfarm payrolls and average hourly earnings. The market will probably focus on the latter, though. The average hourly earnings increased in the previous month by 0.3% on March and the median of market expectations for May points toward a 0.2% growth in wages. A higher than expected growth rate could suggest a stronger inflation pressure which could, in turn, increase the probability of rate hikes and cause the dollar to appreciate.

Taking into account the importance of the aforementioned data, one could probably expect an increase in the dollar’s volatility during the next week. If the PCE inflation doesn’t disappoint and Friday’s report confirms a good condition of the US labour market, the dollar could visible gain against the euro.