Afternoon analysis 29.06.2017

The euro was supported by higher than expected consumer inflation in Germany, however, positive data also came for the dollar in the form of an upward revision of Q1 GDP growth rate. The Polish currency lost value as a result of worse sentiment in the stock markets and an increased chance of a tighter monetary policy by leading central banks.

Euro gained further

The euro, the pound and the Canadian dollar all remained strong today supported by their respective central bankers. However, the appreciation of the aforementioned currencies deepened the dollar’s plunge – the US currency’s value against the euro was the lowest since May 2016. The EUR/USD pair climbed to as much as 1.144, while it was below 1.12 only three days ago. The GBP/USD also climbed visibly and oscillated around the 1.30 level. As a result, the dollar’s index (DXY) dropped to approx. 95.4 pts, which was the lowest level since October.

The dollar gained some support, in the form of a revised annualised GDP growth rate for Q1. The final reading showed a growth rate of 1.4% year-over-year, which was 0.2 pp above the previous reading and 0.7 pp higher than the preliminary data. The dollar’s initial reaction wasn’t substantial – EUR/USD still traded close to the 1.14 level.

Destatis published today a report on consumer inflation (CPI) in June in the German economy. The price growth rate increased to 1.6 YOY, 0.2 pp above the market consensus. The inflation data helped the euro maintain its recent gains and increased the probability that tomorrow’s inflation data for the eurozone won’t disappoint expectations (1.2% YOY) and could even be slightly higher, which may give additional support to the euro.

Not a good scenario for zloty

A combination of the higher chance of tighter monetary policy by the ECB and Bank of England and a slightly dampened sentiment in the European stock markets was a negative scenario for the Polish currency. The zloty lost against most currencies – the EUR/PLN exchange rate once again rose to 4.25. The zloty even lost against the weaker dollar which cost around 3 p.m. 3.73 PLN, some 2 gr more than in the morning.

The Polish currency has been particularly susceptible to changes in the sentiment. Should the market perception regarding a more hawkish stance of the leading central banks (in contrast to the Polish National Bank) remain the same, the zloty could continue to be under pressure. The Polish currency could be additionally weakened if the US indexes were visibly lower today.

Tomorrow’s preview

Friday will probably be the most important day of the current week in terms of macroeconomic publications. Although the currency market reacted in recent days mainly to central bankers’ comments during the forum in Portugal, tomorrow’s data could greatly increase volatility in the market.

The Office for National Statistics (ONS) will publish at 10.30 a.m. UK’s GDP growth rate in the Q1. Although it will be the third and final reading, a deviation from the consensus and previous reading (2% YOY) could increase the pound’s volatility. ONS will also share the current account data for Q1 at the same time as the GDP data. A substantial increase of the UK’s deficit in the current account could slightly weaken the pound – the market consensus suggests an increase from a deficit of 12 billion to 16 billion pounds.

Against the backdrop of recent market developments, Eurostat’s 11 a.m. June consumer inflation report for the eurozone could prove particularly important. It decreased in May to 1.4% YOY (and the core index to 0.9% YOY), while it recorded 1.9% YOY only in April (core: 1.2% YOY). The market consensus points toward the main inflation index falling to 1.2% YOY (and the core increasing to 1.0%). Hence, we should expect a significant increase in euro’s volatility around the time of the Eurostat’s publication. Should it miss the market expectations, the euro could substantially lose value.

At 2.30 p.m., the Bureau of Economic Analysis (BEA) will publish a report regarding the PCE inflation. This index has been taken into account by the Federal Reserve (Fed) into their inflation projections. It could prove even more important this month in the context of a hawkish Fed and a significant drop in the dollar’s value lately caused by an increased market perception of monetary policy tightening in the euro area and in the UK. As in the previous case, the US currency could be quite volatile around the BEA publication time. The dollar could be supported by a reading above the consensus, i.e. above 1.4% YOY.