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Afternoon analysis 29.12.2017

29 Dec 2017 15:29|Bartosz Grejner

Another weak day for the dollar with the EUR/USD trading at 1.20. The German consumer price index (CPI) rose 0.2 percent above expectations in December to 1.7% on a yearly basis. The zloty will likely finish the year with hefty gains against major currencies.

Surprising inflation in Germany

The dollar was yet again noticeably weaker during today’s session (as of 3 p.m. CET). The main currency pair, the EUR/USD, grew to 1.20 – its highest level in three months. Data from Europe’s biggest economy didn’t help the US currency either and they could also exert further pressure on the dollar in coming hours.

According to Destatis’ flash estimate, German consumer inflation (CPI) was at 1.7% in December, 0.2 percentage points above market expectations. In monthly terms, average prices for consumers grew by 0.6%, which is the highest pace since February.

Inflation components were positive as well. Service prices increased by 1.6% compared to a corresponding month of the previous year. This growth pace was last observed in September. On the other hand, the growth rate of goods prices fell from 2.1% year-on-year in November to 1.8% in December.

Today’s data from the German economy could also increase the probability of a higher than expected inflation reading for the whole euro area, which could translate to a higher valuation of the euro. In the following hours, the calendar of scheduled publications is virtually empty. However, taking into account the fast pace that the EUR/USD reached 1.20 with and the dollar’s recent weakness, we could see some further significant price fluctuations of this pair.

A weaker dollar helps the zloty

A much worse condition of the dollar in recent days was to the benefit of emerging market currencies. The zloty also gained as a result by reaching new 3-year lows in relation to the dollar: the USD/PLN pair fell to 3.48 today. The positive sentiment towards the zloty was helped by relatively lower volatility of the EUR/PLN pair. It tested the 4.17 level, its lowest since June. However, the spike in EUR/USD lifted the pair to approx. 4.177, which was close to yesterday’s level.

The aforementioned empty calendar in the next few hours should favour the stabilisation of the zloty. However, another wave of global dollar weakness during afternoon hours (when investors from the US will be more active) could spark a retest of today’s USD/PLN lows.

Next week’s preview

The dollar was under heavy pressure in the last few days of 2017. However, the first week of the new year will be important and could bring much-needed relief for the US currency. The ISM index for the US manufacturing sector will be published on Wednesday. After reaching above 6-year highs in September (60.8 points), the index fell slightly over the next two months.

The market consensus points toward a further decline (minimal at 0.1 points) to 58.1 points. Taking into account the recent rapid slump of the dollar, a reading close to September’s data could support the dollar, although it isn’t the most important publication.

The most anticipated publication will be the report by US Department of Labor regarding the state of the labour market in December, which is scheduled to be released on Friday. Apart from payrolls data, the greatest focus will be placed on the change in average hourly earnings. This quick growth could exert pressure on inflation, which, in turn, could translate to a stronger dollar.

Even a small increase in average hourly earnings above 0.3% in monthly and 2.5% in yearly terms could spark a significant increase in dollar’s valuation should the payrolls post an increase in the range of 190-200k.


29 Dec 2017 15:29|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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