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Afternoon analysis 28.07.2017

28 Jul 2017 15:03|Bartosz Grejner

GDP data from the US economy so far with limited impact on the dollar. Inflation in Germany above expectations may suggest slightly higher price growth in the euro area as well. The CHF/PLN lowest since the releasing the peg to the euro by the SNB.

Mixed data from the USA

Today, Destatis has published June's preliminary data on consumer inflation (CPI) in Germany. Prices in the largest economy in Europe increased by 1.7% compared to the corresponding month of the previous year and by 0.4% in June. In annual terms, it was the highest level of inflation since April, while the monthly increase of 0.4% was the highest since February this year. In both cases, the readings were 0.2 pp. higher than expected.

Comparing with the level of July 2016, the energy prices have increased by 0.9%, while in June of this year they remained unchanged. The high growth rate of June prices (1.7% YOY) has been also maintained. As a result, aforementioned factors have contributed the increase of inflation both above expectations and June's reading (1.6%). This may also lead to the speculation that the reading for the eurozone (due to be released on Monday) will be higher than expected, which should strengthen the euro.

At 2.30 pm, the Bureau of Economic Analysis (BEA) released the data on US GDP growth in the second quarter, which turned out to be somewhat mixed. The pace of growth compared to the previous quarter was 2.6%, which was in line with expectations. However, the final figures on GDP change in the first three months of this year were revised downwards from 1.4% to 1.2%. On the other hand, consumer spending was revised upwards from 1.1% to 1.9%.

Compared to the second quarter of the previous year, GDP has increased by 2.1%. Investments at the same time have increased by 2.9%. In both cases, these were the highest level of growth since the third quarter of 2015. Therefore, the data ultimately was not bad despite the initial negative reaction of the dollar. As a result, investors' attention may move relatively quickly towards weekly inflation readings and the labour market report. Therefore, today's BEA data on GDP will likely have a relatively neutral impact on the dollar.

The franc has been the weakest to the zloty since releasing the peg

Today, the attention was paid to the relationship of the franc to the zloty. The CHF/PLN rate fell below 3.75, thus setting the lowest level since January 13, 2015, so the day of releasing the peg to the euro. It is only 20 gr more than the course we have observed before the decision of the Swiss central bank (SNB). It should be noted, however, that this has been mainly a result of the global weakness of the franc, not the strength of the zloty.

The Polish currency has remained relatively weak. In relation to the Hungarian forint (PLN/HUF), zloty’s value was close to four month lows. The EUR/PLN was also near to the upper limit of the last three months. The zloty can be subjected to relatively large fluctuations in the near future. Political factors may continue to play a role in this, but also next week's publications from the US may significantly affect the value of the zloty.

Next week's preview

The coming week may prove to be important for the currency market. Taking into account the recent large movements on it, i.a. on the euro or the dollar, scheduled events can set new directions in which individual currencies will follow in the next days or even weeks.

On Monday, the Eurostat will present preliminary consumer inflation data (CPI). Investors may be particularly sensitive to this publication - the euro has recently benefited substantially from the optimism of the European Central Bank (ECB) about the eurozone’s economy state, speculation about a possible winding down of the bond-buying program, or by incoming data confirming positive market developments in the common currency market.

On Tuesday, we will learn the PCE's level of inflation, therefore, the type of inflation that the Federal Reserve (Fed) has been taking into account in its projections. In a recent Fed statement, members of the Federal Open Market Committee said they would be watching inflation readings closely. The dollar's value against the euro fell yesterday to its lowest level in just over 2.5 years. Hence, the deviation from consensus (1.3% YOY for the headline and 1.4% for the core inflation) could cause significant changes in the probability distribution of interest rate increases. In the case of such a scenario, we could observe significant shifts in the value of the US currency.

The next week's most important event for the British currency will probably be the announcement of the Bank of England decision on the monetary policy. While neither the level of interest rates nor the size of the bond purchase program is expected to change, the number of people voting for the rate increases will be important. At the previous meeting, three members voted in favour of raising them - currently, the market expectations point to two.

In addition, minutes of this Monetary Committee meeting will be published at the same time. It will be important for its tone and attitude towards future interest rates in the context of a very good labour market report, slowdown of inflation, and still negative real wages for the UK. The relatively mild tone of the statement coupled with the vote of two (or less) members for a rate hike could significantly overwhelm the pound that has been constantly under the pressure due to the Brexit process.

On the last day of the week, the US Department of Labor will publish a labour market report, which, in conjunction with the Tuesday's inflation reading, will probably determine the dollar’s value in the near term. The most important among the report may be data about the change of average wages in July. Their low growth level (2.5% YOY or less) could confirm low inflationary pressure and reduce the chance of interest rate hikes, thus exerting downward pressure on the dollar.


28 Jul 2017 15:03|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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