Afternoon analysis 28.02.2017

The market is anticipating Donald Trump’s testimony. Growths on both the franc and the yen. The zloty remains stable.

GDP and consumer expenses

Today, volatility was limited in the currency market. This is most likely the result of anticipation for Donald Trump’s testimony in front of the Congress (3.00 CET). Two hours before the opening of the New York Stock Market, Robert Kaplan of the FOMC made his testimony at the University of Oklahoma. Bloomberg informed that in Kaplan’s opinion it is not the time, but the path of rate hikes that matters. He also added that the Federal Reserve should abandon its accommodative monetary policy.

However, Kaplan’s statements had a limited impact on the dollar and the EUR/USD remained near 1.06. However, the safe haven currencies, such as the yen or the franc, were increasing. The USD/CHF was pushed to 1.004 and the USD/JPY reached the level of 112.1. This may suggest that investors are quite uncertain regarding the testimony from the American president.

At 14.30, the Bureau of Economic Analyses (BEA) published the GDP growth for the fourth quarter. This reading was consistent with the initial GDP reading (1.9% YoY), but worse than the market consensus (2.1% YoY). This result was mainly caused by the consumer expenses (2.05%) and local investments (1.45%). However, net export was negative and decreased the final result by 1.7 percentage points. Even though this reading increased the dollar’s volatility, the EUR/USD remained near the 1.06 level.

Zloty is stable

Due to the above mentioned appreciation of the franc, the zloty lost approximately 0.4% against the Swiss currency. The EUR/PLN has been within the range of 4.31-4.32 for the entire day. The USD/PLN may react significantly to Donald Trump’s testimony. Currently, this pair is within the range of 4.06-4.08. If the American president mentions the tax reform or an increase in infrastructural expenses in his testimony, the USD/PLN would bounce to the level of 4.10-4.15.

Tomorrow’s events

At 9.00, IHS Markit will publish the Polish PMI for February. This index has been clearly increasing over the past three months. In October, it was slightly above the 50 level, which separates progress from regress. In January, the Polish industrial PMI reached the level of 54.8 points, which was its highest level since March 2015. This confirms a positive sentiment in Poland’s economy. Currently, the market consensus is at the level of 54.6 points. Even though this level is lower than previously, it’s still at a relatively high level. Moreover, the recently positive data from Poland may suggest that the PMI reading may be better than expected. This would raise the zloty’s value.

At 9.55 and at 10.00, we will know the German and the euro zone’s industrial PMI for February, respectively. Initial readings of these indexes were very positive and emphasized a positive sentiment in both economies. At 10.30, Markit will publish the British PMI, which is estimated to drop by 0.3 points (to 55.6 points). This would be a second consecutive month of this index’s depreciation. Potential fluctuations of the euro seems limited. However, the pound may be more volatile, due to its sensitivity to the economic data which has been caused by Brexit.

At 14.00, Destatis will publish the initial inflation data from Germany for February. Due to an increase in the raw material prices, this index has recently been increasing (1.7% YoY and 1.9% YoY in Dcember and January, respectively). The market consensus is currently at the level of 2.1% YoY. Taking into consideration that the recent growth was a result of higher oil prices, this reading should have a limited impact on the euro.

At 14.30, the Bureau of Economic Analysis (BEA) will publish the American PCE for January. This will be an important reading, because the Federal Reserve uses this index for its inflation forecasts. The PCE is significant for the dollar, as well as for potential rate hikes. The market consensus is currently at the level of 1.8% YoY.

At 16.00, we will know the American ISM for February. This index has been increasing for five consecutive months (49.4 in July and 56 in January). The market consensus is at the level of 56 points. Both the PCE and the ISM may cause a significant volatility of the dollar.