Afternoon analysis 28.06.2017

Information coming from the European Central Bank suggested that the market misinterpreted Mario Draghi’s speech on Tuesday. The zloty lost slightly as a result, although a more dovish tone from the ECB is positive for the Polish currency.

Unexpected news from the ECB

During today’s session, we saw a continuation of the euro’s appreciation and a weaker dollar. The EUR/USD pair rose to nearly 1.14 – the highest level in a year’s time. Shortly after 2 p.m., Bloomberg broke the news, citing ECB sources, that the central bank thinks that Mario Draghi’s (ECB President) speech was misinterpreted, i.e. too “hawkish”.

This information caused the EUR/USD to plunge approx. 80 bp even below the 1.13 level. The scenario of the eurodollar returning to 1.14 is probably very limited as a result. We also wrote in our morning analysis that the EUR/USD reaction to Draghi’s comments, which were perceived hawkish at the time, was probably exaggerated. Hence the relatively sharp reaction to the comparably dovish ECB news today.

The market could now once again discount the more dovish view of the monetary policy by the ECB and the euro could, as a result, lose value in the next few hours of trading. Today’s developments suggest that June’s consumer inflation data could be particularly important for the euro. The CPI index for Germany will be published tomorrow and for the eurozone – on Friday. Should they both show a continuation of the recent downward trend, EUR/USD could move closer to 1.12 once again.

Positive news for the zloty

The aforementioned ECB-related news was a positive one for the zloty. The initial reaction diminished the risks to the Polish currency which we mentioned in the morning analysis. The probability of a faster than expected tightening of the monetary policy by the ECB was lowered and a potentially weaker euro, as a result, helped lift the European indexes and reverse most of the losses sustained during the course of the day.

However, the zloty was slightly weaker after about an hour once the news had broken out. This was partly due to the influence of other heavily impacted currency pairs. A continuation of the accommodative monetary policy by the ECB coupled with a positive sentiment in the European markets is good news for the zloty enabling it to maintain its relative strength. The risk to the Polish currency’s valuation remains as a potentially appreciating dollar, as a result of e.g. better than expected inflation or jobs report.

Tomorrow’s preview

There are a few publications planned for tomorrow that could potentially increase volatility in the currency market, especially when taking into account the recent appreciation of the euro coupled with the weakening of the dollar.

At 8 a.m. GfK will publish the consumer confidence index which jumped to the highest level in 15.5 years a month ago. On Monday, the Ifo institute published its business climate index that increased to the highest level since the German Reunification. It’s highly probable then that the consumer survey by GfK won’t disappoint as well and the reading will be around the last month’s level (10.4 pts) or even slightly above.

Three hours later the European Commission will publish the business and consumer confidence index. Should it confirm its recent upward trend and the GfK data prove to be solid as well, the high valuation of the euro could receive additional support.

Destatis will share data regarding consumer inflation (CPI) in June in the German economy. The price growth has slowed down in recent months from 2.2% to 1.5% year-over-year. The current market consensus point towards a further decline to 1.4% YOY. The report could prove especially important in the context Mario Draghi’s comments from Tuesday regarding inflation and the temporary characteristics (of its decrease). Bearing in mind that Germany is the biggest economy in the eurozone (and in Europe as well), the Destatis publication could increase the volatility level, especially in the case of EUR/USD.

The Bureau of Economic Analysis will publish at 2.30 p.m. on Thursday the final data on the growth rate of the US economy in the first quarter. The preliminary reading indicated that the economy grew at a pace of 0.7% year-over-year, although the second reading showed an increase of 1.2% YOY - 0.3 percentage points above expectations. The market consensus point towards the US GDP growing at a pace of 1.2% YOY. However, should the reading deviate from that level, the dollar could be quite volatile, given the recent developments.