Afternoon analysis 29.08.2017

Geopolitical factors still have the greatest impact on the currency market in the afternoon - the EUR/USD remains above 1.20. Despite the dollar's weakness, the flow of capital towards safer assets deteriorates the zloty's valuation.

Safest assets still the winners today

The situation on the market till 3 p.m. did not change much in comparison with the morning trading. The dollar was still under pressure - the EUR/USD pair was close to today's highs at the 1.207 level, which has also set the highest exchange rate since January 2, 2015. As a result, the dollar index (DXY) moved, since midday to 3 p.m., in the narrow range between 93.6 - 93.8 points.

There also wasn’t any improvement in the market's sentiment - still, assets known as "safe haven" have significantly appreciated, with the simultaneous depreciation of assets with a relatively higher risk. In the afternoon, main European stock indexes have deepened the scale of depreciation - the German DAX index (of 30 largest companies) lost nearly 2%.

Taking into account an almost empty economic calendar (at 4 p.m. consumer climate index in the US), today's geopolitical factors have mainly affected today’s trading. Their significant impact may persist until the end of the week when, i.e. inflation and the US labour market data will be published. Investors may focus on them to a large extent, as they may set the direction of the dollar in the coming weeks.

The aforementioned EUR/USD exchange rate close to the 1.20 boundary may also be a problem for the European Central Bank. Now, the ECB relies on a zero interest rate (and negative deposit rate) and an asset purchase program of 60 billion EUR a month to stimulate the price increases in the eurozone.

The high exchange rate of the single currency area, if it persists, may interfere with the steady path of inflation growth and the inflation target. Therefore, if data from the US economy this week have disappointed investors it could lead to further dollar depreciation and the euro strengthening. In such a case, the ECB members could start expressing their concerns about the exchange rate (as it was during the last ECB Governing Council meeting), despite it not belonging to the ECB's mandate. Therefore, excluding political factors, the potential for further appreciation of the euro seems to be limited.

Weaker sentiment does not help the zloty

Similarly to the previous months, today, the Polish currency was somewhat weaker as a result of the worsening market sentiment. The zloty lost mainly to the globally stronger franc and the euro today. The Swiss currency was gained just over 1% in relation to the zloty today, reaching the highest exchange rate since last Thursday, while the euro's exchange rate against the zloty rose to approx. 4.27 and was close to yesterday's highs.

With the beginning of the New York Stock Exchange session, a slight rebound of the dollar was observed - it also made the USD/PLN exchange move by approx. 2 gr from the two-year lows. The zloty rates in the next few hours will most likely be dependent on sentiment changes in the market. If the main US indexes significantly depreciated in the following hours, we could see the further weakening of the zloty.

Tomorrow's preview

At 2 p.m., the Federal Statistical Office (Destatis) will publish August's preliminary readings on consumer inflation (CPI). After a significant decline in this index in Germany to 1.5% in annual terms (while in February it was still at 2.2%), in July it rose to 1.7%. The median of market expectations points to continuing this upward trend in August and reaching 1.8% year-on-year (and 0.1% compared to the previous month).

Taking into account that Germany is Europe's largest economy, a deviation from the aforementioned consensus could slightly change expectations for the eurozone's inflation reading, which will be released the following day. In the case of such a scenario, we can expect an increased fluctuation around the time of the publication.

Fifteen minutes later, ADP's report on August's employment change will be published, which in turn, may significantly affect the dollar's valuation. ADP's employment data may give investors hints on the official reading of the US Department of Labor, which will be released two days later. Previous months, however, showed that the correlation between the data from these two reports is not ideal, therefore, the final response to this data may be limited.

A quarter of an hour after the employment report's publication, the Bureau of Economic Analysis (BEA) will provide data on US's GDP growth in the second quarter. This will be a second reading - preliminary data showed a 2.6% growth compared with the same period last year. As previous BEA publications show, further readings may differ from previous ones and from market consensus (currently 2.7%).

Taking into account the current sharp dollar's weakening over the past few days, tomorrow's data, although not the most important this week, may introduce significant fluctuations in its trading. However, we will probably have to wait until Friday afternoon when the last major weekly dollar's publication will be released (August's labour market report) in order to see what the final reaction will be.