Afternoon analysis 29.08.2016

Positive data about consumption and expenses of Americans. The American base case inflation remains at the 1.6% y/y level, despite an estimated decline. The zloty remains weak but stable in the afternoon.

Incomes, as well as expenses of Americans in month on month relation were consistent with estimations. In July, they increased 0.4% m/m and 0.3% m/m, respectively. However, the data for June was reviewed up by 0.1%. This is a positive information that allows to extend a positive condition of the American currency.

Moreover, if we look at the year on year data, we will see that they're positive as well. In comparison to July 2015, incomes increased by 2.7%, and expenses by 3.0%. What's interesting is a large increase in expenses for durable goods (6.3% y/y). This may mean a larger comfort when it comes to the future financial situation of Americans. This is because durable goods are usually more expensive (cars, furniture).

The base case inflation at the 1.6% y/y level against 1.5% y/y expectations, can be also considered as positive regarding the dollar's condition. PCE base case inflation is one of the basic elements included in the Federal Reserve's macroeconomic forecasts. Some of the FOMC members (including Lael Brainard) expected it to decline in the second part of the year. This process is not happening for the time being. Therefore, it may mean a larger eagerness to increase interest rates.

As a result, the EUR/USD went clearly below 1.1200 this afternoon. The market is disposing itself towards more hawkish Fed and even rate hikes in September. Even though we agree with the general appreciation tendency for the dollar in the mid-term, we think that the market is overestimating rate hikes next month (despite positive data).

Thus, before the EUR/USD will continue to grow, as well as possibly go to the 1.10 area, there is a large chance that there will be one more wear-off on the American currency. It's difficult to say whether a catalyst of this wear-off will be the interview with Stanley Fisher tomorrow, or the data from the American labor market on Friday. If none of these factors is a sufficient enough argument for a weaker dollar, the FOMC meeting would most likely be negative for the USD. That is, if according to our expectations interest rates remain at an unchanged level.

Zloty is weak, but stable

The morning exit of the EUR/PLN to the 4.34 area has withdrawn. This may partially be caused by the fact that there is no larger nervousness in the global market. The emerging market currencies are relatively stable and the American stock market began its session with slight growths.

However, if there is an increase in the dollar's value combined with a deterioration of the global sentiment, the EUR/PLN may quickly go above 4.35 and the dollar may exceed the 3.90 level. Such a situation is possible on Friday, if the American labor market data are interpreted as an element that increases the probability of rate hikes in the USA.